RBA stays put

Update The Reserve Bank held interest rates steady for a second month in a row, arguing that emerging signs of a recovery averted the need for an additional cut.

The key cash rate remains at a 49-year low of 3 per cent. The central bank had lopped 425 basis points from the official rate between last September and April in a bid to keep the economy expanding through a global downturn.

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''Evidence has continued to emerge that the global economy is stabilising, after a sharp contraction during the December and March quarters,'' RBA Governor Glenn Stevens said in a statement.

''The considerable economic policy stimulus in train in most countries is helping to contain the downturn, and should support an eventual recovery,'' Mr Stevens said.

The federal government has pumped more than $50 billion into the economy in the last half year and earmarked record investments - and record deficits - to compensate for an expected slump in business spending.

''It is very important that fiscal and monetary policy is working together to stimulate our economy, to support vital employment in the economy, to support the business community and to support the rural community,'' Treasurer Wayne Swan told reporters.

The Australian dollar retreated after the RBA announcement, buying 80.55 US cents, or down about half a US cent. Stocks held on to their gains of about 1.6 per cent for the day, closing at their highest for 2009.

Rates outlook

Today's RBA statement convinced some economists that the RBA's series of rate cuts is over, with a rate rise becoming a possibility before the year is out.

Macquarie interest rate strategist Rory Robertson noted the RBA's readiness to cut interest rates again ''if needed.''

''The story that's been emerging in the last few weeks is that low rates are promoting growth. Home construction and home prices are turning higher, showing that policy is working,'' he said.

"So, the RBA is on hold for the foreseeable future, and we're less sure that there will be any further rate cuts at all."

ICAP's chief economist Adam Carr is penciling in a rate rise.

''I don't think they will ease again, given the domestic and global economy recovery. I think rates will be on hold until the end of the year with a potential for a rate hike by December."

Each-way bet

Moody's Economy.com's Matt Robinson said the RBA's accompanying statement  ''starts off very bold, with confident statements about a turnaround evident in global economy, particularly China and the emerging markets'' but that upbeat view is set against a readiness to reduce rates again.

The RBA seems to be ''confident enough of an eventual recovery that interest rates aren't going to be eased further,'' he said. ''At the same time it's sending a clear signal to markets that have been pricing in optimism about growth, in particular through higher long-term yields,'' that the RBA remains ready to cut again.

''This is the RBA's implied way of saying the market is getting ahead itself (with expectations of higher rates) and there is little chance of a rate rise any time soon,'' Mr Robinson said.

In recent weeks, the market has been pricing in the possibility of an interest rate within 12 months, according to data from Credit Suisse. Today, the market expectation rose to a full 25 basis points increase by next June, underscoring hopes of a recovery.

Recession or not?

The RBA's Mr Stevens noted that ''better conditions in global financial markets'' are helping to improve prospects, while ''the turnaround is clearest in China and some other emerging countries''.

That said, however, the RBA notes Australia's economy has been contracting. ''Capacity utilisation has fallen back to about average levels, and will decline further over the rest of the year,'' Mr Stevens said.

Other signals in the economy are mixed.

''A pick-up in housing credit demand suggests stronger dwelling activity is likely later in the year,'' the RBA statement said. ''Business borrowing, on the other hand, is declining, as companies postpone investment plans and seek to reduce leverage, in an environment of tighter lending standards.''

One factor giving the RBA scope to make more interest rate cuts is that it sees the threat of inflation receding further. That's in part because demand for labour is weakening, squeezing wages growth, the bank said.

Recent economic indicators have mostly been surprisingly positive. In April, for instance, the official jobless rate confounded analysts with a fall, while building approvals data out today showed a strong 5.1 per cent jump for the month.

Also out today were trade numbers revealing the current account deficit narrowed more than expected, a shift that will add 2.2 percentage points to the March quarter GDP growth figure alone.

Indeed, the healthy trade figures have thrown in doubt forecasts that Australia's economy will post a second consecutive quarter of contraction - the commonly accepted definition of recession - when the Australian Bureau of Statistics releases national accounts data tomorrow. The nation's GDP shrank 0.5 per cent in the December quarter.

czappone@fairfax.com.au

BusinessDay, with Reuters, AAP