Aust. rates seen on hold as economy eases


Australia's construction sector is continuing to perform strongly

Geoff Hiscock
CNN Asia Business Editor

SYDNEY, Australia (CNN) -- Lower than expected economic growth in Australia in the June quarter almost certainly means interest rates will stay on hold, economists said Tuesday.

The central bank met early Tuesday to review Australia's official cash rate, which now stands at 4.75 percent.

It will make its decision known at 9.30 am Wednesday local time, but there is now an overwhelming expectation there will be no change.

That follows the release of national accounts figures by the Australian Bureau of Statistics just before midday Tuesday showing gross domestic product rose 0.6 percent in the June quarter, following a 0.7 percent rise in the first quarter.

Year on year, the economy grew 3.8 percent in the June quarter.

Still a high rate

While this is slightly lower than the 4 percent expected by analysts, it is still among the highest rates in the world for developed economies.

UBS Warburg chief economist in Australia, Mark Rider, told CNN that a dip in June company profit data suggested economic momentum was not "quite as strong" as originally thought, but a growth figure of about 4 percent for the year was still likely.

He said the weaker Australian dollar and a strong housing sector had helped the Australian economy out-perform the rest of the world recently.

Rider said he expected housing investment would stay at a high level before falling at the end of the year. Housing-related spending would also moderate.

The result would be a slowdown in annual growth to about 3 percent by the middle of next year.

One more rise tipped


The Reserve Bank of Australia is expected to leave rates on hold this week

The Reserve Bank of Australia (RBA) has said in recent months that it wants to move to a "neutral" rate setting, which the market interprets as about 5.5 percent.

But Rider said he now believed there would be only one more rise of a quarter of a percentage point to 5.0 percent from the RBA in the current cycle.

Nomura Australia economist Tom Kenny said in a commentary after the release of the GDP figures that he did not expect the RBA to move on rates on Wednesday.

He said tentative signs the economy was slowing, along with increased global uncertainty, would motivate the bank to "stay its hand" on rates.

"We think that growth likely peaked in the 1H02 (the first half of 2002), with activity driven by a voracious consumer and a boom in housing activity," he said.

"These forces are expected to moderate in 2H02; the housing boom has run its course and consumers are close to finding the bottom of their pockets."

Kenny said that if the economy was to continue to make headway, business investment needed to be stepped up.

Global developments

But he noted that any plans were vulnerable to global developments.

The Australian Bureau of Statistics said the spending side of GDP was driven by domestic demand and the housing sector.

On the production side, it said the main contributors were the construction industry, and health and community services.

The Australian dollar is steady at 54.88 U.S. cents in Tuesday afternoon trade. On the stock market, the benchmark S&P/ASX200 index is 0.11 percent higher at 3134.2.