The Reserve Bank of Australia (RBA) has left the cash interest rate unchanged and says the stance of monetary policy will provide significant support to demand in the economy in the period ahead.
The central bank on Tuesday maintained the cash rate at three per cent, after cutting it by 25 basis points in April, and at a 49-year low.
The decision, following its regular monthly board meeting, had been anticipated by financial market economists.
RBA governor Glenn Stevens said in a statement that interest rates had already been cut significantly in recent months and the effects on the economy were still 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,” he said.
“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.”
He said a contraction in the domestic economy that began in late 2008 had continued into 2009 “to date”.
Both domestic and international demand was weaker while capacity utilisation had fallen back to about average levels and would decline further over the rest of this year.
“With demand for labour weakening, growth in labour costs will probably also fall,” Mr Stevens said.
“These conditions are likely to see inflation continue to abate, though this is occurring only gradually so far, as the effects of the decline in the exchange rate are pushing up some prices.”
Mr Stevens said there had been a decline in term debt spreads and firmer equity prices in recent months in Australia.
“Borrowing for housing is picking up, particularly among first-home buyers,” he noted.
But business borrowing was declining as companies curtailed investment plans and sought to reduce debt, in an environment of tighter lending standards.
“Monetary policy has been eased significantly,” Mr Stevens said.
“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.”
Mr Steven said also that the near term outlook for the global economy remained weak, although the Chinese economy had picked up speed in recent months.
As a result, commodity prices had firmed a little.
effect of these changes is yet to be observed.
“The considerable economic policy stimulus in train in most countries should help contain the downturn and support an eventual recovery,” he added.
Meanwhile, conditions in global financial markets remained “generally on a path of gradual improvement”.
Equity prices were off their lows, term debt spreads had declined and capital markets were re-opening.
“Nonetheless, confidence remains fragile and balance sheets are under pressure from the effects of economic weakness on asset quality,” Mr Stevens said.
“Credit remains tight.
“Continued progress in restoring balance sheets remains essential to durable recovery.”