Reserve Bank leaves rates on hold

Updated

The Reserve Bank has left interest rates unchanged at its first board meeting of the year, keeping the official cash rate at 4.25 per cent.

In a statement, RBA governor Glenn Stevens said progress had been made to ease the "acute financial pressures" on banks in Europe late last year and the mood on financial markets had since improved.

Mr Stevens pointed to signs of moderate growth in the United States economy as well as "robust" indicators of growth in China in the second half of last year.

Expansion in the Australian economy was close to trend, he said, although data pointed to its multi-speed nature and the Australian dollar had appreciated more than the central bank had expected.

Federal Treasurer Wayne Swan said the decision recognised the strength of the Australian economy.

"In doing this today the Reserve Bank has struck a balance between global uncertainty on the one hand and Australia's strong economic fundamentals on the other," Mr Swan said.

The board noted that the consumer price index had declined as forecast, and the RBA expected underlying inflation to remain within its target range of 2 to 3 per cent in the next two years.

But Mr Stevens said banks' standard variable mortgage rates were now close to their medium-term average since the RBA moved to cut rates in November and December.

"With growth expected to be close to trend and inflation close to target, the board judged that the setting of monetary policy was appropriate for the moment," Mr Stevens said.

"Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy."

Most economists had expected the central bank to reduce rates by 25 basis points, pointing to rising unemployment, a weak housing market, poor retail sales and easing inflation.

But JP Morgan economist Ben Jarman was one of a minority who had tipped rates would stay on hold, saying the RBA would likely wait for last year's cuts to filter through the economy.

The Australian dollar soared after the announcement, reaching a record high against the euro and a six-month high against its US counterpart.

At 3pm (AEDT) it was buying 107.8 US cents, 82.7 Japanese yen, 82.3 euro cents, 68.2 British pence and $NZ1.29.

The board next meets on March 6.

Topics: money-and-monetary-policy, business-economics-and-finance, economic-trends, australia

First posted