The Reserve Bank of Australia (RBA) has maintained official interest rates at a 49-year low amid signs that the global economy is stabilising and that domestic inflation will continue to abate.But the central bank left open the door to further rate cuts, if they are needed.

“The board’s current view is that the outlook for inflation allows some scope for further easing of monetary policy, if needed,” governor Glenn Stevens said in a statement accompanying the decision.

“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.”

The RBA decided to leave the cash rate unchanged at three per cent after its board meeting on Tuesday, as had been widely expected.

Mr Steven said while the Australian economy was not as as weak as had been expected wages growth was still likely to slow as demand for labour softened, helping to ease inflationary pressures.

“Economic conditions in Australia have to date not been as weak as expected a few months ago,” he said.

“But output has been sluggish and capacity utilisation has fallen back to about average levels, with some further decline likely over the rest of the year.

“Weaker demand for labour is leading to lower growth in labour costs.

“These conditions should see inflation continue to abate over the period ahead.”

Mr Stevens said a pick-up in demand for credit for housing suggested dwelling activity would rise later in the year.

“House prices are tending to rise,” he added.

But business borrowing had been declining, as companies postponed investment plans and sought to reduce debt in an environment of tighter lending standards.

“Large firms have had good access to equity capital, which is assisting in strengthening their financial structures,” Mr Stevens said.

Mr Stevens noted that after sharp contractions in the December and March quarter, there were now signs the global economy was stabilising.

“Downside risks to the outlook have diminished, with conditions in global financial markets improving this year and action to strengthen balance sheets of key financial institutions under way,” he said.

“Growth in China has strengthened considerably, which is having an impact on other economies in the region, including Australia.”

But conditions in credit markets remain tight and the effects of economic weakness on asset quality presented “a challenge”.

Still there was “tentative evidence that the US economy is approaching a turning point”, although conditions in Europe were still weakening.

“While the considerable economic policy stimulus in train around the world should support recovery, it is likely to be slow at first,” Mr Stevens said.

“For it to be durable, continued progress in restoring balance sheets is essential.”

Mr Stevens noted also that Australian monetary policy had been eased significantly since September last year.

“Market and mortgage rates are at very low levels by historical standards, despite recent small increases,” he said.

“Business loan rates are below average.

“The effects of these changes will still be coming through for some time yet.”

He added that recent fiscal stimulus measures taken by the Federal Government were providing considerable support for demand and the economy.

AAP