Economists believe the Reserve Bank's decision to leave rates on hold shows faith in the economy that will be rewarded by positive growth in this morning's national accounts figures.
The Reserve's decision to end its series of consecutive big cuts by leaving official interest rates on hold at a 45-year low of 3.25per cent was seen as a pause, not the end of reductions.
Economists expect rates could drop as low as 2per cent and saw yesterday's decision as a sign the Reserve wants something in reserve for further reductions if conditions worsen beyond expectation.
It was not all good news, though. The Australian sharemarket dropped to a new five-year low. Despite clawing back big early losses that came after Wall Street falls prompted by the latest United States bail out, the All Ordinaries lost 1per cent to close at 3171.4.
The Government continues to warn the global downturn will hit Australia's economic growth hard, even though the latest data was better than expected and effectively cancelled out Monday's poor results on company profits and inventories.
Prime Minister Kevin Rudd said it was getting ''harder and harder for Australia to single-handedly resist the global economic tide''.
''Despite the challenges, despite the twists and turns ... I have every confidence that not only will we come through this crisis but in doing so, we will build a stronger, tougher, more resilient Australia than ever before.''
Reserve Bank governor Glenn Stevens was generally optimistic about the state of the economy.
''In Australia, demand has not weakened as much as in other countries and, on the basis of currently available information, the Australian economy has not experienced the sort of large contraction seen elsewhere,'' he said.
''... Together with the substantial fiscal initiatives, the cumulative decline in interest rates will provide significant support to domestic demand over the period ahead. On this basis, notwithstanding evident economic weakness at present, the board judged that the stance of monetary policy was appropriate for the moment.''
There have been fears the Australian Bureau of Statistics will revise down the September quarter's 0.1per cent increase in gross domestic product.
This means there is a risk today's figures could show Australia is already in a recession.
However, economists upgraded their expectations for this morning's gross domestic product figures after new data showed the current account gap narrowed more than expected, from $9.5billion to $6.5billion. It included the largest trade surplus since records began in 1959 of $4.1billion for the quarter.
St George economist Amanda Tan said this was mostly because of higher prices for exports.
''Indeed, in the December quarter, export volumes actually fell by 0.8per cent. But this was much less than the 6.8per cent fall in import volumes. The very weak Australian dollar could have buffeted the slowdown in export volumes,'' she said. Treasurer Wayne Swan said the Government's first economic stimulus package was working as its December cash handouts appeared to spread into January.
Retail sales were expected to fall 0.5per cent, but shoppers spent an extra 0.2per cent on top of December's 3.8per cent rise although there were some fears the increase could be only because of higher prices. The ACT had one of the higher results, increasing spending by 1.5per cent.
The national result was driven by increases in food (up 1.5per cent) and eating out (up 2.3per cent) and came despite a big fall in household goods (down 4per cent).
Opposition Leader Malcolm Turnbull said there was no evidence the December ''cash splash'' had ''any positive effect beyond a slight increase in retail sales''.
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