Reserve Bank leaves rates on hold at 3%

The Reserve Bank of Australia has kept the official interest rate at 3%, with the board deciding the move is appropriate for the current economic conditions.

Governor Glenn Stevens said in a statement the economy is beginning to recover, but there are still a number of pressures on the economy and business sentiment.

“Economic conditions in Australia have been stronger than expected, with consumer spending, exports and business investment notable for their resilience. Measures of confidence have recovered… Unemployment has not, to this point, risen as far as had been expected.”

“Sentiment in global financial markets has continued to improve. But the affects of economic weakness on the balance sheets of financial institutions will still be coming through for a while. This constitutes one of the main remaining risks to the global expansion. For the recovery to be durable, continued progress in restoring balance sheets is essential.”

Additionally, Stevens noted that while the global economy is recovering, growth is still expected to be quite low.

“The major economies appear to be approaching a turning point. Most observers still expect only modest growth in the world economy in 2010, due to the continuing legacy of the financial crisis, though forecasts have been revised up recently.”

The decision comes after new data from the Australian Bureau of Statistics reveals business conditions were worse than expected in the second quarter.

The data, released yesterday, reveals company gross operating profits declined 7.8% during the second quarter, but profits before income tax also rose 5.4% compared with the previous quarter.

However, the value of stocks held by private businesses dropped 3.4%, while the estimate for wages and salaries dropped 1.1%.

Inventories fell by a seasonally adjusted 3.4% during the quarter, with manufacturing sales of goods and services falling by a seasonally adjusted 1.1%. The seasonally adjusted estimate for wholesale trade’s sales of goods and services rose by 2.9%.

The ABS figures also come after the TD Securities-Melbourne Institute monthly inflation gauge revealed inflation fell to 1.7% in August from 1.9% in July.
Today’s rate decision also comes after Stevens said in a speech last month that interest rates will rise as the economy recovers.

“There will come a time when the exceptional monetary stimulus in place at present will no longer be needed. It will then be appropriate for the board to do what it has done on past such occasions, namely to start adjusting interest rates back towards normal levels,” he said.

The RBA recently lifted its GDP forecast to 0.5% for 2009 and has also dismissed the need for further interest rate cuts, saying “it now appeared unlikely this would be necessary”.

National Australia Bank and JP Morgan expect the RBA to lift the cash rate by 5 basis points in the December quarter, while Citigroup and ICAP expect a 25 basis point increase. Westpac expects the next rate rise in February next year.