Homeowners are being urged to brace for an interest rate rise as the central bank signals a return to growth is looking more likely than a recession.

The Reserve Bank of Australia (RBA) announced on Tuesday it would leave the official cash rate on hold at a 49-year low of three per cent for the fourth consecutive month.

But this time, in its accompanying monetary policy statement, it removed references to the scope for “further easing if needed”.

In a shift from an easing to a neutral bias, RBA governor Glenn Stevens indicated the chance of a severe recession hitting Australia had diminished.

“Economic conditions in Australia have been stronger than expected a few months ago, with both consumer spending and exports notable for their resilience,” Mr Stevens said in the statement.

“Measures of confidence have recovered a good deal of ground.

“This suggests that the risk of a severe contraction in the Australian economy has abated.”

The RBA also indicated that a housing sector-led recovery and government spending programs would help economic growth firm into 2010, as a stronger Australian dollar helped contain inflation.

Treasurer Wayne Swan told a foreign investment forum in Sydney that Australian interest rates were likely to rise.

“As the global economy recovers, it is inevitable that global interest rates will rise from their unprecedented lows and Australian rates will rise as well,” he said.

NAB Capital chief economist Rob Henderson said the RBA’s shift away from an easing bias showed the next move in interest rates was more likely to be up.

“I guess the question is when,” he told Sky News on Tuesday, adding that rates were more likely to rise in the second half of 2010.

Three hours before the RBA rates decision, official data showed retail sales fell by 1.4 per cent in June, marking the biggest slide in four months.

The result followed a one per cent increase in May and showed sharp falls in department store trade and clothing sales.

However, overall retail sales in the June quarter grew by two per cent as consumers on low and middle incomes spent their $900 cash bonuses from the Rudd government.

But Australian Chamber of Commerce and Industry (ACCI) acting chief executive Greg Evans said the recovery message had been oversold and called on the RBA to put off raising rates.

“Any early increase in interest rates, even if it was towards the end of this year, we’d be concerned that could choke off economic recovery and that would be a concern to Australian business,” he told reporters in Canberra on Tuesday.

The ACCI’s survey of 2,500 firms for the June quarter, released on Tuesday, showed an improvement in business conditions for the June quarter.

But the score of 35.4 points, up from 34.1 points previously, was still below the key 50 level separating expansion from contraction.

Measures of investment in buildings and factory equipment went back further into negative territory, while struggling profits and employment showed signs of recovery.

Even as China shows signs of “very strong” growth, the RBA is expecting investment spending to remain weak as consumer spending slows in the short-term.

Mr Swan said the Australian economy would rely less on the US and more on China and India when the global crisis ended.

For now, however, he said business investment was likely to be weak, justifying the need for stimulus packages to aid the labour market.

Countering that argument, the opposition’s acting treasury spokeswoman Helen Coonan said the RBA’s move to neutral bias was a “tipping point”.

“Signs of growth: that means the government should take a long, hard look at the spending in the stimulus,” Senator Coonan told Sky News on Tuesday.

But in an upside to the economy, the RBA observed on Tuesday that house prices had risen over recent months on the back of “solid” home loan approvals.

Australian Bureau of Statistics data released on Tuesday showed house prices rose by 4.2 per cent in the June quarter, more than making up for a 1.5 per cent fall in the previous quarter.

AAP