RBA to keep rates steady for now

Borrowers have been delivered a reprieve this month, but can expect the central bank
to increase the cash rate later in the year because of the strong local economy and
inflation concerns.
Economists say the Reserve Bank of Australia's (RBA) decision to leave the overnight
cash rate unchanged for the first time in four months was expected, but predict
rates will only stay on hold for a few months.
On Tuesday, the central bank kept the overnight cash rate at 4.5 per cent following
three consecutive monthly rises and six in total since last October.
RBA governor Glenn Stevens said a lift in Australia's export earnings and stubborn
inflation, along with recent rate rises indicated monetary policy was apt for now,
despite concerns about the impact of the European debt crisis on the global economy.
"Interest rates to borrowers are around their average levels of the past decade,
which is a significant adjustment from the very expansionary settings reached a year
ago," Mr Stevens said in the accompanying statement.
"Taking all the available information into account, the Board views this setting of
monetary policy as appropriate for the near term."
TD Securities senior strategist, Annette Beacher, said the RBA would sit tight on
interest rates for at least another month.
"Clearly the RBA is comfortable with the heavy lifting done to revert to average,
but a shift to restrictive policy will be on the RBA agenda as inflation pressures
are building," Ms Beacher said.
"However, future policy adjustment will be data dependent locally and calmer markets
need to prevail offshore."
The RBA uses monetary policy to keep inflation within its target band of two to
three per cent over the economic cycle.
Underlying inflation, the RBA's preferred measure as it omits volatile price
movements, was 3.05 per cent in the March quarter, ABS data showed.
Mr Stevens said in Tuesday's statement that inflation was likely to stay in the
upper half of the RBA's target zone.
JP Morgan chief economist Stephen Walters said the RBA's cycle on interest rates
rises had not ended, with the next increase expected in August following the release
of consumer price index (CPI) data for the June quarter on July 28.
"This inflation report probably will deliver a rise in headline CPI of at least one
per cent quarter-on-quarter, and still-elevated readings on the core measures," Mr
Walters said.
"While much of the rise in headline inflation will owe to the recent sharp rise in
the tax on tobacco, the inflation shock will reinforce the argument that the RBA
probably should not be leaving the cash rate steady for too long."
Mr Walters forecast the RBA to lift the cash rate in August and again before the end
of 2010 to five per cent.
RBC Capital Markets senior economist, Su-Lin Ong, said the statement accompanying
the decision was "very short".
"In an uncertain global backdrop with mixed local economic data, it is probably
better to wait for further developments, both domestically and offshore."
Ms Ong said the statement suggested the recent uncertainty about the European debt
crisis had not derailed the RBA's optimism for global economic growth.
"They are still comfortable in terms of Asian growth at this stage and as well as
North America," she said.