Cash rate remains unchanged
May 5, 2009
The Reserve Bank of Australia has left the cash interest rate unchanged and says it will keep monitoring the progress of the economy before deciding if further rate reductions are needed.
The central bank on Tuesday said the domestic economy had remained soft into 2009 'to date' and that demand for labour was weakening.
However, it saw some signs of stabilisation in several major industrialised economies and a pick in the Chinese economy in recent months.
Monetary policy in Australia and abroad had already been cut significantly, and it was still to be seen how this played out in the world economy, together with fiscal stimulus initiatives by major western governments, including Australia.
'The stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead, RBA governor Glenn Stevens said in a statement.
'In assessing whether further reductions in the cash rate are required over the period ahead, the board will monitor how economic and financial conditions unfold, and how they impinge on prospects for a sustainable recovery in economic activity.'
The central bank on Tuesday maintained the cash rate at a 49-year low of three per cent, after cutting it by 25 basis points in April.
The decision, following its regular monthly board meeting, had been widely anticipated by financial market economists.
Mr Stevens said a contraction in the domestic economy that began in late 2008 had continued into 2009 'to date'.
Domestic and international demand was weaker while capacity utilisation had fallen back to about average levels and would decline over the rest of this year.
'With demand for labour weakening, growth in labour costs will probably also fall,' Mr Stevens said.
'These conditions are likely to see inflation continue to abate, though this is occurring only gradually so far, as the effects of the decline in the exchange rate are pushing up some prices.'
Mr Stevens said there had been a decline in term debt spreads and firmer equity prices in recent months in Australia.
'Borrowing for housing is picking up, particularly among first-home buyers,' he noted.
But business borrowing was declining as companies curtailed investment plans and sought to reduce debt, in an environment of tighter lending standards.
'Monetary policy has been eased significantly,' Mr Stevens said.
'Market and mortgage rates are at very low levels by historical standards and business loan rates are below average, reducing debt-servicing burdens considerably.
'Much of the effect of these changes is yet to be observed.'
Mr Steven said while the near term outlook for the global economy remained weak, the Chinese economy had picked up speed in recent months and as a result commodity prices had firmed a little.
'The considerable economic policy stimulus in train in most countries should help contain the downturn and support an eventual recovery,' he added.
Meanwhile, conditions in global financial markets remained 'generally on a path of gradual improvement'.
Equity prices were off their lows, term debt spreads had declined and capital markets were re-opening.
'Nonetheless, confidence remains fragile and balance sheets are under pressure from the effects of economic weakness on asset quality,' Mr Stevens said.
'Credit remains tight.
'Continued progress in restoring balance sheets remains essential to durable recovery.'
