Friday February 20, 01:44 AM
UPDATE 2-Australia c.bank head sees further scope on rates
By Anirban Nag
SYDNEY, Feb 20 (Reuters) - Australia's central bank has the ammunition to cut interest rates further in coming months if economic conditions worsen, although they are unlikely to fall as much as in the United States and UK, its governor said on Friday.
In semi-annual testimony to Parliament, Reserve Bank of Australia (RBA) Governor Glenn Stevens said the near-term outlook for the economy was weak, but hoped the downturn was not a deep one and the country was better placed than many others to emerge from the crisis in a fairly good shape.
'We are prepared to go low enough,' he told lawmakers when asked if Australian rates could go to nearly zero as in the U.S. or to 1 percent as in Britain.
'I am not sure our interest rates will go that low. We have, I think, enough power in the interest rate instrument to do what will be appropriate.'
The Australian dollar slipped from a session high of $0.6484 after the comments while bill futures continued to price in around a 50 basis point reduction next month.
Earlier in February, the central bank cut its key cash rate by 1 percentage point to a record low of 3.25 percent, citing a grim global outlook. That brought total cuts since September to 400 basis points to cushion the economy from the global downturn.
'Governor Stevens indicated that the central bank will ease rates again if needed, but we believe that the size of cuts will be smaller and there may be pauses between meetings,' said Besa Deda, chief economist at St George.
'Our low point for the cash rate this year remains 2.25 percent. Australia cannot remain immune to the severe synchronised downturn in the world economy, but RBA stimulus is needed to help cushion the slowdown underway.'
Markets are expecting the RBA to conclude its easing cycle at around 2.25 percent by the middle of this year, as it steps up its efforts to cushion the economy from the global downturn.
Stevens, however, refrained to say how low rates can go.
'I'd rather not pick a number as the resting point. The markets are currently toying with something like 2 percent or 2.25 percent. I have no particular desire today to either encourage or disabuse them,' Stevens told lawmakers.
LARGE DOSE OF STIMULUS
The government has also weighed in to prop up the economy, unveiling a package of A$42 billion ($27 billion) in infrastructure spending and income support earlier this month on top of A$10.4 billion of pump priming late last year.
The aggressive rate cuts and generous government hand outs have so far supported demand. On Wednesday, fourth-quarter retail sales showed a healthy rise, pointing to a decent gain in real consumption and lessened the risk of a negative gross domestic product (GDP) reading in that quarter.
Still, six of Australia's top 10 trading partners are already in recession. The RBA last week cut its forecasts for growth, expecting the economy to grow by just 0.5 percent in 2009, while unemployment is likely to rise significantly in the months ahead, from the current 4.7 percent.
'We are being affected by the global downturn, and cannot realistically expect other than weak conditions in the first part of 2009,' Stevens said.
'But the very large reduction in interest rates, the lower exchange rate and the major fiscal initiatives will work to support demand, increasingly so as the year goes on. Inflation is likely to continue its moderation and to do so faster than expected six months ago.'
Stevens said by acting early in the downturn and frontloading the stimulus, Australia would be considerably better placed than a lot of other countries to weather the economic downturn.
He expected the measures to have an impact on the lower end of the housing market and to lead to a pickup later in the year in demand for construction of new dwellings.
'The RBA sees itself as having eased aggressively and well ahead of the domestic economic data,' said Michael Blythe, chief economist at Commonwealth Bank of Australia (Munich: 882695 - news) .
'Any further moves would be more modest in scope and less rapid. We have, of course, been down this path before only to see the deteriorating global backdrop prod the RBA into further action.'
(Additional reporting by Wayne Cole in Sydney and James Grubel in Canberra)
(Editing by Kim Coghill) Keywords: AUSTRALIA ECONOMY/
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