Reserve Bank leaves interest rates on hold at 2.5 per cent

Updated

The Reserve Bank has left Australia's official interest rate steady at the historic low of 2.5 per cent.

The decision to leave the cash rate on hold for Melbourne Cup day was widely tipped by economists, given recent improvements in the unemployment rate, retail sales and building approvals.

In a statement, RBA governor Glenn Stevens said the economy was likely to keep growing at a slightly slower than average pace in the short term as it "adjusts to lower levels of mining investment".

The RBA board took note of a rise in household and business confidence since the September federal election, but said it was still too early to tell how long this would last.

The central bank began cutting interest rates exactly two years ago, on Cup day in 2011, and Mr Stevens says the easing has supported house prices and "interest-sensitive" spending.

The board said would take a while for the full effects of the 225 basis points sliced from the cash rate since November 2011 to show.

"Housing and equity markets have strengthened further, trends which should in time be supportive of investment," Mr Stevens said.

Mr Stevens also described the exchange rate as still too high.

"The Australian dollar, while below its level earlier in the year, is still uncomfortably high," he noted.

"A lower level of the exchange rate is likely to be needed to achieve balanced growth in the economy."

After falling as low as 89 US cents in August, the dollar has edged back towards parity with its US counterpart after the US Federal Reserve unexpectedly delayed a decision to start winding back its massive stimulus program in mid-September.

The dollar fell a quarter of a cent after the announcement and at 2:38pm (AEDT) was buying 94.8 US cents.

Deutsche Bank chief economist Adam Boyton says while the overall tone of the statement was unchanged from October, there were a couple of minor shifts.

"The first probably expresses a slightly higher degree of concern around the level of the Australian dollar," Mr Boyton said.

"But the second change offsets that somewhat and suggests the bank is getting a little more confident that demand outside the mining sector will lift over the coming year or so."

The RBA last lowered rates in August.

'People are scared to spend'

Josephine Marshall runs an interior design and fashion boutique in Adelaide.

She says she is disappointed in the RBA's decision to leave interest rates unchanged.

She says the RBA has missed an opportunity that would have triggered "an immediate response at the checkout".

"If they had a little more in their back pockets they would have an irrational feel-good factor," she said.

"People are scared to spend; they're feeling generally apprehensive about their future, about economic circumstances in Australia.

"People come, see, enjoy and aspire to do things in the home but that aspiration, that desire doesn't always translate into a sale."

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

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