RBA leaves rate at 4.5 percent

The Reserve Bank has held off raising interest rates, amid positive signs for businesses trying to secure credit

September 7, 2010

The Reserve Bank has held off raising interest rates and has pointed to positive signs for businesses struggling under tight credit conditions.

Meeting today, the RBA board decided to leave the cash rate at 4.5 percent on the basis Australia’s economy is growing close to trend while inflation remains close to target.

Governor Glenn Stevens says domestic credit and asset markets are more balanced compared to six months ago, with signs lending agencies are beginning to release restrictions on borrowers.

"Business credit has stabilised and while credit conditions for some sectors remain difficult, evidence is slowly emerging of more willingness to lend," Stevens says.

He says financial markets have improved the past few months alongside a growth in Australia’s terms of trade to their peak of two years ago.

While saying the Australian economy has been growing at trend pace, Stevens adds that caution persists in financial markets due to soft equity prices and yields on sovereign bonds. Commodity prices are also down.

Stevens likens the growth in Australia’s economy to the Federal Government’s stimulus spending. But he also points to a rise in private demand.

"The high level of the terms of trade is boosting incomes, which will tend to add to demand over the year ahead, while the effects of earlier expansionary policy measures will be diminishing. Indications are that business investment in particular could increase strongly," he says.
The RBA also cites a rise in wages following a decline last year. However, the growth is not expected to have a significant impact on inflation.

"Through to mid 2011, underlying inflation is likely to be in the top half of the target zone, while CPI inflation will probably be just above 3 per cent for a few quarters due to the impact of the tobacco tax changes," Stevens says.

Internationally, Stevens says growth in China is moderating along with other countries in Asia. He says output in Europe has improved, but anticipates slow growth in the year ahead.

And while some commentators debate whether the US will enter a double dip recession, Stevens says growth in the first half of 2010 has been solid. He says the pace of expansion in the second half of the year is weaker.

His comments come following President Barack Obama decision to pump $50 billion into roads, railways and airport runways to improve infrastructure and reduce the country’s 9.6 percent unemployment rate.

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