RBA leaves interest rate unchanged at 3%

The Reserve Bank of Australia (RBA) has left the cash interest rate on hold and says
its monetary policy settings are appropriate, as the risk of a severe contraction in
the Australian economy fades.
The central bank left the rate at three per cent for the fourth month in a row after
its board meeting on Tuesday.
"The board's judgment is that the present accommodative setting of monetary policy
is appropriate given the economy's circumstances," RBA governor Glenn Stevens said
in a statement.
"The board will continue to monitor how economic and financial conditions unfold and
how they impinge on prospects for sustainable growth in economic activity and
achieving the inflation target."
The no-change outcome was widely expected after a survey of 19 economists by AAP
found all believed the RBA would not move the rate this month.
Mr Stevens said economic conditions in Australia have been stronger than expected a
few months ago, with both consumer spending and exports showing resilience.
"Measures of confidence have recovered a good deal of ground," he added.
"This suggests that the risk of a severe contraction in the Australian economy has
abated."
The most likely outcome in the near term was that the economy could see a period of
sluggish output, consumer spending slowing "somewhat", and weak investment.
"Stronger dwelling activity and public spending will start to provide more support
to overall demand soon, and growth is likely to firm into 2010," Mr Stevens add.
Still, the RBA continues to look forward to a gradual moderation in inflation, to
reflect earlier declines in energy and commodity prices, and the impact of weaker
demand on prices and labour costs.
"Given the current prospects for demand and output, this moderation should continue
over the year ahead," Mr Stevens said.
A higher exchange rate should also help.
Mr Stevens noted demand for housing credit had been solid and that dwelling prices
had risen in recent months.
But business borrowing was declining, as companies postponed investment plans and
sought to cut debt in a tighter lending environment.
Large firms, however, have had good access to equity capital, and access to debt
markets appeared to be improving, he said.
Economists said the statement by RBA governor Glenn Stevens accompanying the
decision dashed the likelihood of another cut and heightened expectations that the
bank is on course to raise rates, perhaps as soon as early 2010.
The RBA began cutting the cash rate last September and by April this year had lopped
425 basis points of the rate.
RBC Capital markets senior economist Su-Lin Ong said the tone of Mr Stevens' new
statement suggested the next rate move would be up, although the RBA appeared to be
in no hurry.
"The short statement was peppered with caution and more balanced than the market had
feared," she said.
Nomura Australia chief economist Stephen Roberts said the absence of any commentary
referring to the potential for rates to be cut further meant the RBA had ended its
easing cycle.
"They have brought back a policy bias, from an easing bias back to neutral," Mr
Roberts said.
"They've taken out all wording referring to a capacity to lower rates further.
"But it could be quite a lengthy period on hold because inflation is coming down and
the outlook on the economy is still fairly mixed."
Head of research at financial markets research group 4Cast, Ray Attrill, said there
were fears, reflected in market pricing, that the central bank would shift
immediately to a tightening bias.
"That evidently hasn't happened," Mr Attrill said.
"It's distinctly neutral, which is inconsistent with where the market is priced.
"The market had a better than 50 per cent chance of a 50 basis point rate rise by
Christmas.
"I don't think there is anything in the statement to encourage the view that the RBA
could be tightening as early as late 2009."
Mr Attrill said money markets had rallied slightly as an immediate, "knee-jerk"
reaction to the RBA statement.
He said market players would be cautious ahead of Friday's RBA quarterly statement
on monetary policy, where the central bank will publish its updated forecasts on
inflation and growth.
"I think the market is very cautious about pricing out too much in terms of future
tightening until it sees both the revised forecasts on Friday and the explicit
narrative," Mr Attrill.
"I think we are going to see both upward revisions both to growth numbers and to the
inflation numbers.
"On inflation, probably what is key is the out-years forecasts, those for two years'
time."
Turning to the global outlook, Mr Stevens said the world economy was stabilising as
"considerable" economic stimulus flowed through.
"Downside risks to the global outlook have diminished, though they have not
disappeared and most observers expect only modest growth overall," he said.
Mr Stevens reiterated there was "tentative evidence" the US economy was approaching
a turning point.
But conditions in Europe were still weakening, even though growth in China had been
very strong in recent months.
"Sentiment in global financial markets has continued to improve," he added.
"Nonetheless, credit conditions remain difficult, and the effects of economic
weakness on asset quality present a challenge.
"For the global economic recovery to be durable, continued progress in restoring
balance sheets is essential."