The Reserve Bank left its key interest rate unchanged, citing a revival in China as cause for hope that the worst may be over.

Official interest rates are at a 49-year low of 3%, where the central bank has moved them in response to the slowing economy.

Silver lining on interest rates

''While the near-term outlook remains weak, there are further signs of stabilisation in several countries,'' said Governor Glen Stevens in a statement. ''The Chinese economy in particular has picked up speed in recent months and many commodity prices have firmed a little.''

''I think they feel they've done enough,'' said economist Adam Carr of ICAP. ''There would need to be a further deterioration in the labour market or a flare up in the financial crisis to push them into cutting again.''

Mr Carr foresees no chance of a rate cut until after the June quarter inflation numbers are released on July 22.

The RBA has cut 425 basis points from interest rates since September in an effort to blunt the worst effects of the recession.

In that time, repayments on an average $400,000 mortgage have fallen by about $1000 a month as commercial banks passed on most of the RBA's cuts.

Financial markets took the RBA's announcement in its stride, with stocks little changed. The Australian dollar, though, rose marginally to 74.11 US cents, but later dropped back below 74 US cents.

Fragile confidence

Financial markets have risen for most of the past two months, placing most stock markets - including Australia's - back into positive territory for the year.

The RBA's statement noted the ''path of gradual improvement'' in equity markets and a revival of credit markets but warned that more economic pain is on the way.

''(C)onfidence remains fragile and balance sheets are under pressure from the effects of economic weakness on asset quality,'' Mr Stevens said. ''Credit remains tight.''

The central bank noted that the Australian economy started shrinking towards the end of 2008, and the contraction has continued ''in 2009 to date,'' both at home and abroad.

It predicted wage increases will diminish as unemployment rises, helping to ease inflation further.

Banking on China

Recent data pointing to a rebound in China - likely to become Australia's largest trading partner this year - is underpinning much of the RBA's stance, said TD Securities Senior Strategist Annette Beacher.

''We were looking for more of an easing bias in the statement given the weak data flow and we expect the weak data to continue,'' said Ms Beacher. ''But it appears the RBA is staunchly convinced of a Chinese recovery.''

Yesterday a gauge of Chinese manufacturing rose to its highest in nine months, while other measures including investment spending have also been trending higher.

In Australia, though, several key indicators are likely to get worse before improving, including unemployment, denting government revenues and sapping wider demand in the economy.

The jobless rate, currently at 5.7% is tipped to rise to 5.9% on Thursday. JP Morgan economist Helen Kevans forecasts the unemployment rate climbing to 9% by the end of 2010 as the economy gets dragged down by the global recession.

Source: Fairfax