RBA keeps rates on hold
August 4, 2009The Reserve Bank of Australia (RBA) has left the cash interest rate on hold and says its monetary policy settings are appropriate, as the risk of a severe contraction in the Australian economy fades.
The central bank left the rate at three per cent for the fourth month in a row after its board meeting on Tuesday.
'The board's judgment is that the present accommodative setting of monetary policy is appropriate given the economy's circumstances,' RBA governor Glenn Stevens said in a statement.
'The board will continue to monitor how economic and financial conditions unfold and how they impinge on prospects for sustainable growth in economic activity and achieving the inflation target.'
The no-change outcome was widely expected after a survey of 19 economists by AAP found all believed the RBA would not move the rate this month.
Mr Stevens said economic conditions in Australia have been stronger than expected a few months ago, with both consumer spending and exports showing resilience.
'Measures of confidence have recovered a good deal of ground,' he added.
'This suggests that the risk of a severe contraction in the Australian economy has abated.'
The most likely outcome in the near term was that the economy could see a period of sluggish output, consumer spending slowing 'somewhat', and weak investment.
'Stronger dwelling activity and public spending will start to provide more support to overall demand soon, and growth is likely to firm into 2010,' Mr Stevens add.
Still, the RBA continues to look forward to a gradual moderation in inflation, to reflect earlier declines in energy and commodity prices, and the impact of weaker demand on prices and labour costs.
'Given the current prospects for demand and output, this moderation should continue over the year ahead,' Mr Stevens said.
A higher exchange rate should also help.
Mr Stevens noted demand for housing credit had been solid and that dwelling prices had risen in recent months.
But business borrowing was declining, as companies postponed investment plans and sought to cut debt in a tighter lending environment.
Large firms, however, have had good access to equity capital, and access to debt markets appeared to be improving, he said.
Turning to the global outlook, Mr Stevens said the world economy was stabilising as 'considerable' economic stimulus flowed through.
'Downside risks to the global outlook have diminished, though they have not disappeared and most observers expect only modest growth overall,' he said.
Mr Stevens reiterated there was 'tentative evidence' the US economy was approaching a turning point.
But conditions in Europe were still weakening, even though growth in China had been very strong in recent months.
'Sentiment in global financial markets has continued to improve,' he added.
'Nonetheless, credit conditions remain difficult, and the effects of economic weakness on asset quality present a challenge.
'For the global economic recovery to be durable, continued progress in restoring balance sheets is essential.'
