BREAKING NEWS: RBA leaves interest rates on hold

The Reserve Bank has decided to maintain the official interest rate at 3%, with Governor Glenn Stevens saying the RBA will monitor monetary policy to decide whether further cuts are necessary.

Stevens said in a statement that the global economy is beginning to stabilise, conditions in financial markets are beginning to improve and noted that growth in China has strengthened “considerably”.

“Nonetheless, credit conditions remain tight and the effects of economic weakness on asset quality present a challenge. There is tentative evidence that the US economy is approaching a turning point, but conditions in Europe are still weakening.”

“While the considerable economic policy stimulus in train around the world should support recovery, it is likely to be slow at first. For it to be durable, continued progress in restoring balance sheets is essential.”

Stevens also said that economic conditions in Australia have not been as weak as expected, but that output has “fallen back to about average levels”, with further declines expected for the year ahead.

“The Board’s current view is that the outlook for inflation allows some scope for further easing of monetary policy, if needed. In assessing how it might use that scope, the Board will continue to monitor how economic and financial conditions unfold and how they impinge on prospects for a sustainable recovery in economic activity.”

The RBA has left rates on hold since April, when it cut rates by 0.25% to 3%. The pause over the last few months is seen as an opportunity for the RBA to asses the strength of the Australia economy, which has shown resilience, with retail sales and the property sector holding up particularly well despite the global economic downturn.

Most economists, including Westpac’s chief economist Bill Evans, expect the RBA to cut rates again this year (Evans is tipping a 0.25% cut in August) as unemployment starts to rise.

Yesterday’s job ad data from ANZ, which showed the number of job ads shrunk by around 7% in June, indicates the jobless rate is set to jump sharply.
“We expect the unemployment rate to rise by around 2 percentage points to 7.5% by the end of 2009. That is likely to be met with a couple of 25 basis point rate cuts from the RBA,” Evans said earlier this week.