RBA leaves interest rates on hold

Submitted 2/06/2009

AAP

The Reserve Bank of Australia (RBA) has left its key cash rate unchanged after today's board meeting, as widely expected by economists.

The central bank left the cash rate at a 49-year low of 3.0 per cent, a level it has been at since April when the RBA cut the rate by 25 basis points.

In total the RBA has slashed the rate by 425 basis points since last September.

Still, RBA governor Glenn Stevens has left open the door for a further interest rate cut down the track.

"The prospect of inflation declining over the medium term suggests that scope remains for some further easing of monetary policy, if needed," Mr Stevens said in a statement.

"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."

Business SA Chief executive officer Peter Vaughan said there was still a need to lift business and consumer sentiment, and a further cut in interest rates would have been justified. He said he would like to see further rate cuts in the coming months to kick-start confidence.

"The previous reduction in rates failed to have its maximum effect as the banks failed in their obligation to pass on the intended relief," he said.

"Employment growth is slowing and figures to be released tomorrow are likely to indicate that Australia is officially in a recession.

"Increasing consumer demand should be a key priority, particularly with the global economic conditions remaining a threat to business confidence and investment."

Mr Stevens said there was evidence that the global economy was stabilising after a sharp contraction, while prospects were being helped by better conditions in global financial markets, and confidence was improving.

However, the Australian economy had been contracting with capacity utilisation expected to decline further during the rest of the year.

"With demand for labour weakening, growth in labour costs is beginning to fall," Mr Stevens said.

"These conditions are likely to see inflation continue to abate over the next two years."

Monetary policy had eased significantly - although much of the effect had yet to be observed - while fiscal measures were also providing considerable support for demand.

Economists said a rate cut today was looking even less likely after data suggested the economy may avoid a second consecutive quarter of negative growth when the March quarter national accounts are released tomorrow.

Exports were much stronger than expected in the March quarter and will contribute 2.2 percentage points to growth.

A recession is defined as two consecutive quarters of negative economic growth.