RBA keeps rates on hold, says growth is “close to trend”

The official interest rate has remained unchanged at 3.5%, in line with economists’ expectations, with the Reserve Bank saying most indicators suggest growth is “close to trend overall”.

 

All 15 economists surveyed by AAP said the RBA would not move the cash rate at its board meeting today, and only two economists forecast a rate cut in September.

 

The last time the RBA cut its cash rate was in June, by 0.25%, following a 0.5% reduction in May.

 

According to RBA governor Glenn Stevens, growth in the world economy has softened after picking up in the early months of the year.

 

“China’s growth has moderated to a more sustainable pace… [while] conditions in other parts of Asia have recovered from the effects of last year’s natural disasters,” Stevens said in a statement.

 

“Growth in the United States continues, but at only a modest pace. The most significant area of weakness continues to be Europe, where economic activity has been contracting.”

 

Stevens warned Europe will remain a potential source of adverse shocks for “some time”.

 

With regard to Australia, Stevens said most indicators suggest growth is close to trend overall.

 

“Labour market data show moderate employment growth, even with job shedding in some industries, and the rate of unemployment has thus far remained low,” he said.

 

“Inflation remains low, with underlying measures near 2% over the year to June, and headline CPI inflation lower than that.”

 

Stevens said the effects of the carbon tax will start to affect these measures over the next couple of months, but the RBA’s assessment of the inflation outlook is unchanged.

 

“It is expected to be consistent with the target over the next one to two years,” he said.

 

“Maintaining low inflation over the longer term will, however, require growth in domestic costs to continue their recent moderation as the effects of the earlier exchange rate appreciation wane.”

 

Stevens said as a result of previous interest rate cuts, monetary policy is “easier” than it was for most of 2011, with interest rates for borrowers a little below their medium-term averages.

 

“While it is too soon to see the full impact of those changes… business credit has over the past six months recorded its strongest growth for several years,” he said.

 

“The exchange rate, however, has remained high, despite the observed decline in the terms of trade and the weaker global outlook.”

 

“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.”

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