RBA leaves interest rates unchanged

Posted on 5/05/2009  

The Reserve Bank decided today to leave official interest rates unchanged at a 49-year low of 3% as encouraging signs emerge in the global economy.

RBA Governor Glenn Stevens says that the impact of earlier interest rate cuts and Federal Government stimulus measures have yet to be felt fully and believes the current low level of rates will help boost demand over time.

“Monetary policy has been eased significantly already,” he says. “Market and mortgage rates are at very low levels by historical standards and business loan rates are below average, reducing debt-servicing burdens considerably. Much of the effect of these changes is yet to be observed.

“The stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead.”

Domain.com.au spokesperson Anthony Ishac says the RBA “remains vigilant”, with enough scope to manoeuvre on interest rates if unemployment rises later in the year. But he says any future action will need to factor in the reluctance of the major banks to pass on rate cuts in full to mortgage holders. 

He says the Federal Budget is expected to deliver further stimulus to the economy and a resilient housing activity presents opportunities for home buyers and investors to take advantage of record low interest rates, strong rental yields and soft prices. 

REISA president Robin Turner also says the decision to leave interest rates on hold allows room for further cuts later in the year if the global downturn deepens.

Stevens says that while the near-term economic outlook remains weak, there are further signs of stabilisation in several countries. “The Chinese economy in particular has picked up speed in recent months and many commodity prices have firmed a little,” he says. “The considerable economic policy stimulus in train in most countries should help contain the downturn and support an eventual recovery.”

Stevens says conditions in global financial markets remain generally on a path of gradual improvement, with equity prices off their lows, term spreads declining and capital markets re-opening. But confidence remains fragile and balance sheets are under pressure from the effects of economic weakness on asset quality. Credit remains tight. Continued progress in restoring balance sheets remains essential to durable recovery.

Stevens says conditions in the Australian economy are likely to see inflation continue to abate, though this is occurring only gradually so far (as the decline in the exchange rate is helping to push up some prices). He notes that borrowing for housing is picking up, particularly among first-home buyers. Business borrowing, on the other hand, is declining, as companies curtail investment plans and seek to reduce leverage, in an environment of tighter lending standards.

In assessing whether further reductions in the cash rate are required over the period ahead, the Board will monitor how economic and financial conditions unfold, and how they impinge on prospects for a sustainable recovery in economic activity, Stevens says.  


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