March 3 (Bloomberg) -- Australia’s central bank left its benchmark interest rate unchanged for the first time in seven months, saying the lowest borrowing costs in four decades and government spending are supporting the economy.

The nation’s currency surged after Governor Glenn Stevens kept the overnight cash rate target at 3.25 percent in Sydney today. Only four of 18 economists surveyed by Bloomberg forecast the decision. The rest tipped at least a quarter-point cut.

Australia’s economy may skirt a global recession after Stevens slashed the benchmark by four percentage points between September and February and the government announced almost A$88 ($56 billion) of spending. A report tomorrow will probably show the economy grew 0.2 percent in the fourth quarter, according to a Bloomberg survey of economists today.

“The Australian economy has not experienced the sort of large contraction seen elsewhere,” Stevens said in a statement. The bank’s rate cuts and government spending will provide “significant support” to the economy, he said.

The Australian dollar rose to 63.97 U.S. cents at 3:45 p.m. in Sydney from 63.45 cents just before the decision was announced. The two-year government bond yield rose 16 basis points to 2.80 percent. A basis point is 0.01 percentage point. Australia’s benchmark S&P/ASX 200 stock index pared its decline to 1.1 percent from 3 percent earlier today.

‘Rates on Hold’

Today’s decision “sends a message that rates are on hold, probably for several more months,” said David de Garis, a senior economist at National Australia Bank Ltd. in Sydney. “They are waiting to see whether what has been done will be sufficient to support the economy given the global trends.”

The U.S. economy shrank at a 6.2 percent annual pace in the fourth quarter, the biggest contraction since 1982. Japan’s economy contracted at the fastest pace since the 1974 oil shock. Exports from China, Australia’s biggest trading partner, slumped 17.5 percent in January, the most in almost 13 years.

The deepening global recession and slumping share markets have forced central banks around the world to slash borrowing costs.

Stocks tumbled worldwide this week, sending the Dow Jones Industrial Average to its lowest level since 1997 after American International Group Inc. posted the largest corporate loss in U.S. history.

Global Rates

The U.S. Federal Reserve’s benchmark rate is close to zero, the Bank of England’s is the lowest since its creation in 1694 and the European Central Bank will probably trim its main rate on March 5 to 1.5 percent, the lowest level in 10 years of setting policy, according to economists.

“Significant macroeconomic policy stimulus is being put in place around the world, but it is too soon to see the effects of those measures,” Stevens said today.

The International Monetary Fund may cut its month-old forecast for the global economy to predict a contraction this year, Nicolas Eyzaguirre, director of the fund’s western hemisphere department, said yesterday.

“Economic conditions are clearly weak, and given the speed and scale of the global economic deterioration and its effect on confidence, weak conditions are likely to continue in the near term,” Stevens said.

Australia’s economy probably expanded 0.2 percent in the fourth quarter from the previous three months and 1.2 percent from a year earlier, according to the median forecast in a Bloomberg survey of economists today. The gross domestic product report will be published tomorrow.

Retail Sales

The economy may have escaped a contraction in the quarter because of a 3.8 percent surge in retail sales in December, driven by cash handouts to the elderly and families totaling A$8.9 billion. Business investment and home lending also gained. Retail sales rose 0.2 percent in January, a report today showed.

Prime Minister Kevin Rudd last month said he will spend another A$42 billion on cash handouts and on infrastructure to drive economic growth.

“The government stands ready to take further action if necessary to support the Australian economy and jobs,” Treasurer Wayne Swan told reporters in Sydney today.

Banks have passed on more than 375 of the 400 basis points policy makers cut from the benchmark rate between September and February, saving home borrowers with an average A$250,000 ($160,000) mortgages about A$600 a month.

“Market and mortgage rates are at very low levels by historical standards and business loan rates are below recent averages,” Stevens said today.

“Together with the substantial fiscal initiatives, the cumulative decline in interest rates will provide significant support to domestic demand over the period ahead.”

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

Last Updated: March 2, 2009 23:50 EST