RBA leaves rates unchanged

CHRIS ZAPPONE
Last updated 16:57 03/07/2012

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The Reserve Bank of Australia has left its key interest rate unchanged as it awaits more signs of the health of the economy at home and abroad.

The central bank's cash rate remains at 3.5 per cent, a result universally expected by analysts. The RBA cut its key lending rate at four of its previous seven monthly meetings, slashing it to the lowest level since November 2009.

Those four rate cuts totalled 125 basis points - with commercial lenders passing on about 97 basis points to their customers. That drop translates into savings of about $180 a month for households with a typical 25-year, $300,000 loan.

"They are clearly aware of the fragility in global economic activity, pointing to a slowdown in China and modest growth in the US and unrest in Europe," said St George acting chief economist Hans Kunnen.

"That sends the signal that they may need to keep our powder dry," he said.

The RBA has to weigh conflicting forces on the economy. The mining boom continues to suck in huge investment even as commodity prices retreat from record highs. On the other hand, cautious consumers are opting to save more of their money, and house prices - a key gauge of wealth for many - are down in most cities over the past year.

The low inflation rate has given the central bank more scope to pare interest rates if needed. Even so, it's not clear that the overall economy requires additional help. Australia's March quarter gross domestic product expanded at twice the pace expected by economists. Building approvals for May posted their biggest monthly increase in more than three decades, according to official figures out today.

The Australian dollar dropped in the immediate aftermath of the RBA decision, losing about one-fifth of a US cent to trade recently at just under US$1.026.

FIREPOWER

The RBA is also be keen to hold back some of its firepower. The bank repeated comments made in previous rate statements that Europe with its ongoing debt crisis remains a potential source of adverse shocks - adding "for some time" in today's commentary.

China, Australia's largest export market, is also showing signs of further slowing.

"The statement is clearly flagging the fact that the international environment is less positive than a few months ago," said Westpac global head of interest rate strategy Russell Jones.

"The subscript, if you like, is that if the international environment worsens any more, easing comes back on the agenda."

The RBA, though, sees no need to move again yet.

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"At today's meeting, the Board judged that, with inflation expected to be consistent with the target and growth close to trend, but with a more subdued international outlook than was the case a few months ago, the stance of monetary policy remained appropriate," the RBA's governor Glenn Stevens said in today's statement.

There are 100 basis points in a percentage point.

- Sydney Morning Herald

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