The Reserve Bank has discounted the likelihood of further interest rate rises, as an easing in consumer spending and housing investment, coupled with a weaker currency and a strengthening global economy, alter the mix between domestic and external sources of growth to a more sustainable position over the medium term.
However, the Bank has left the door open for a tightening of monetary policy, noting in its quarterly statement, released this morning, that the risks to sustainable growth in the medium term with low inflation have not gone away "entirely".
"While the risks to the economy have not gone away entirely, developments over recent months suggest that the chances of achieving well-balanced growth and a more restrained pace of credit expansion have improved," the statement says.
"In these circumstances the Board decided at its recent monthly meetings to hold the cash rate unchanged. In its deliberations on monetary policy, the Board will continue to monitor all these developments and make adjustments as required, with a view to achieving sustainable growth in the medium term with low inflation."
In its statement, the Bank points out that an improving international outlook - including an ongoing strengthening in the US, "exceptional" growth in China and the strongest growth in a decade in Japan - confirm the global economy has picked up significantly in the past year.
"This situation has put upward pressure on international commodity prices, many of which have increased considerably over this period, particularly in the resources sector, a trend that will benefit Australian exporters," it says.
Additionally, "talk" of US monetary tightening over the past month has prompted a fall in the Australian dollar - creating a "more favourable environment" for export growth.
"The normalisation of interest rates by the [US] Fed is, therefore, expected to result in a narrowing of the interest rate differential between the two countries, especially at the short end," the Bank notes.
"The exchange rate has declined recently and is now around 9% below its mid-February peak against the US dollar; in trade-weighted terms it has fallen by a smaller amount, as some of the fall against the US dollar has been a reflection of recent US dollar strength."
Domestically, the Bank says that economic data indicates the economy has continued to grow solidly in 2004, with household spending easing "a little" but expected to remain strong on the back of solid employment growth.
"Consumer confidence is close to its highest level in a decade and consumer spending is likely to continue to be supported by rising employment and real wages," it adds.
Additionally, the Bank notes that a turning point appears to have been reached in the housing market after the overheated levels of late last year, though it is "still unclear how this will evolve".
"Forward indicators continue to suggest a mild easing in activity later in the year, though its extent will be mitigated by a large stock of work yet to be done and strong demand for renovations," it says.
While the Bank notes that there continues to be a sharp contrast between externally and domestically sourced inflation pressures - reflecting the impact of the exchange rate appreciation on import prices, it believes the pass-through of these exchange rate effects will dampen inflation a little further over the coming year.
As a result, inflation is now expected to decline to around 1.75% by the end of this year, rising to around 2.5% by the end of 2005 as the impact of the currency starts to fade.
To read the statement in full,
click here.