News Service from House Harris

RBA says more rate cuts can be made if necessary

SYDNEY, March 31 AAP - The Reserve Bank of Australia (RBA) now sees the economy contracting in 2009, as the nation plunges into recession, and has left the door open for more interest rate cuts.

But RBA deputy governor Ric Battellino also said Australia was well placed to benefit from a resurgence in the world economy, amid some tentative signs of an upswing the US.

His comments on Tuesday mark the first time a central bank official has said in public that it expects gross domestic product (GDP) to contract this year.

Its most recent forecasts in February had the economy growing by an annualised 0.5 per cent in 2009, or by 0.25 per cent on a non-farm GDP basis.

Mr Battellino noted that the RBA had cut the key cash interest rate to a 45 year low in February of 3.25 per cent, since September last year.

"The monetary policy transmission process has been effective and there remains scope to ease policy further if circumstances require," he told the Urban Development Institute of Australia National Congress 2009 in Brisbane.

Mr Battellino said rate cuts and extra spending by Australian governments was supporting the economy, but the nation was not fully protected from the global downturn.

"These measures will go a long way to offsetting the negative influences on the economy coming from abroad, but the reality is that we cannot fully insulate ourselves from what is happening elsewhere in the world," he said.

"As such, GDP is likely to fall in 2009.

The most recent reading for GDP showed the economy contracted by 0.5 per cent in the three months to the end of 2008 - the first quarterly contraction in eight years.

Another quarter of negative growth would see the economy formally enter a recession. The March quarter growth figures will be released in June.

nabCapital head of research Peter Jolly said Mr Battellino had signalled a poor near term economic outlook.

"They have downgraded their forecast a bit and now expect a GDP contraction in 2009," he said.

The RBA says it has some more firepower in its monetary policy arsenal but another interest rate cut following its next board meeting on April 7 is not a certainty.

"The speech is consistent with a continued pause in April if they wish," said Mr Jolly, who expects rates will remain on hold.

Mr Battellino also said the Australian household sector was "still in a relatively sound position" despite falling stock markets and asset prices eroding national wealth over the past months.

He said many households had chosen to save government handouts and maintained their mortgage repayments, even though there had been rate cuts.

"This will give them breathing space if they do subsequently find themselves in circumstances where their repayments are interrupted" through events such as rising unemployment, Mr Battellino said.

Mr Battellino also said the housing market was holding up better than others overseas.

House prices fell on average by three per cent in Australia during 2008, but this was better than the UK and US where prices fell around 20 per cent.

Mr Battellino said Australia had entered the global downturn in "much better shape" than many other nations.

"Australia will remain one of the better performing economies in the developed world and be well placed to benefit from the renewed global expansion when it comes," he said.

China was important to a revival in the global economy and may already have seen the bottom in its own economy, Mr Battellino said.

"While China is not going to return to a 12 per cent growth rate any time soon, it is quite possible that the past six months will turn out to have been the period of maximum weakness in the Chinese economy," he said.

As well, the US economy was starting to show a little improvement, Mr Battellino said.

"On the real economy, we are starting to notice the odd positive economic indicator in the run of US monthly data, in contrast to the universally negative outcomes a few months ago," he said.

"Let's hope this continues."