The reprieve for borrowers may be short-lived, though, with the big commercial banks flagging their intention to pass on rising funding costs in the form of higher interest rates. There was speculation such an increase may come as early as today, but National Australia Bank, Westpac and ANZ said no change to their mortgage rates is imminent.



"We have not made any announcements regarding any changes to our standard variable interest rate at this time," said a spokesperson for NAB. Westpac also ruled out a rate rise until after next month's Reserve Bank meeting scheduled for November 2. ''Our standard variable rate remains unchanged in line with today's RBA decision,'' said a spokesperson for Westpac.



''We have no current plans to change our standard variable rate ahead of next months' RBA meeting.'' It is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target

The Commonwealth Bank said its rates are under review and declined to comment on its likely decision. Rates outlook And the prospect of an official rate rise still looms after the RBA hinted strongly last month it will use rate rises to combat inflation pressures from the booming commodity export sector - a suggestion repeated today by RBA governor Glenn Stevens. ''The current stance of monetary policy is delivering interest rates to borrowers close to their average of the past decade. The Board regards this as appropriate for the time being,'' Mr Stevens said, in a statement accompanying the RBA decision. ''If economic conditions evolve as the Board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target,'' Mr Steven said.

Inflation figures for the September quarter are due on October 27, just days before the central bank's next interest rate meeting on Melbourne Cup Day. The Australian dollar shed almost a full US cent to trade recently at 95.75 US cents. Australia's relatively high interest rates lure investors to the currency, with expectations that the RBA would lift rates today spurring the dollar to a two-year high of 97.5 US last Friday. Financial markets were pricing in an increase of 41 basis points in 12 months' time - implying at least one more rate rise by the RBA by then - down from 53 basis points prior to today's RBA decision. Stocks pared their day's losses after the announcement, ending about 0.4 per cent lower for the day after being off more than 1.4 per cent earlier. RBA view

The RBA signalled that continuing doubts about the health of the international economy contributed significantly to its decision to stay put on interest rates this month. ''Financial markets are still characterised by a degree of uncertainty, and are responding both to differences in growth outlooks between regions and evident strains on public finances and banking systems in several smaller countries in Europe,'' Mr Stevens said in his statement. Greece, Spain and Ireland are among European economies struggling to cope with soaring budget deficits and slowing growth. By contrast, Australia's economy is showing ''growth around trend over the past year,'' with prices for the country's commodity exports ''very high,'' the RBA governor said. Indeed, Australia's key economic measures are mostly improving, with the government's fiscal stimulus spending easing back just as private spending perks up to take up the slack.

Importantly, the quickening growth is yet to stoke a pick-up in inflation, with prices growth moderating from ''the excessive pace of 2008,'' the statement said. ''The effects of the rise in tobacco taxes aside, CPI inflation has been running at around 2.75 per cent over the past year. That looks likely to continue in the near term,'' he said. The Reserve Bank aims to keep inflation between a band of between 2 and 3 per cent over the medium term. Patchy economy One reason why inflation has been held back so far is that the growth of the overall economy - excluding the booming mining sector - remains patchy. Data out today on the services industry showed the sector has contracted for the past five months, while retail sales rose 0.3 per cent in August - less than the 0.4 per cent pace expected.

Housing has also been under a cloud with price growth flattening out in major cities while new building approvals have fallen for six of the last eight months. Other areas of weakness include slow lending growth, implying that banks are holding back on loans to businesses. Mr Scutt noted that the RBA focused also on subdued credit growth.



"This has been getting little or no coverage in recent times but this will be closely watched in the months ahead...Credit has been weak despite the strong domestic labour market," said Arab Bank Australia trader dealer David Scutt. "With households unwilling or unable to borrow more at present, it offers a strong indication that household finances are struggling with rates at present levels."

Other economists pointed to the brevity of Mr Stevens' comments.

''What's notable is that it is quite a short statement,'' said RBC Capital Markets senior economist Su-Lin Ong. ''There's virtually nothing about housing or consumption'' on the statement, she said. "It does suggest maybe the RBA is paying a little more attention to what's happening in Europe and some of the strains in the banking system there," she said.



Even so, "a rate hike before the end of the year in more likely than not," she said. Ms Ong was one of only six economists out of 25 polled by Bloomberg to predict the RBA would stay put today. Loading czappone@fairfax.com.au

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