RBA keeps rates on hold amid foreign debt crises

The Reserve Bank has kept rates on hold at 4.75% amid growing economic uncertainty centered around Australia’s multi-speed economy, and the European and US debt crises.

Speaking at today’s board meeting, RBA Governor Glenn Stevens said while the global economy is continuing its expansion, the pace of growth slowed in the June quarter.

“The central scenario for the world economy over the next couple of years… remains one of growth below the pace of 2010, but at or above long-term averages,” Stevens said.

“Downside risks have increased, however, as concerns have grown over the outlook for the public finances of both Europe and the United States.”

On a local front, Stevens said Australia’s terms of trade are now at very high levels and national income has undergone solid growth.

“Investment in the resources sector is picking up very strongly and some related service sectors are enjoying better than average conditions,” he said.

“But in other sectors, cautious behaviour by households and the high level of the exchange rate are having a noticeable dampening effect.”

“Precautionary behaviour by households… looks likely to keep some areas of demand weaker in the near-term than earlier expected.”

Despite growing reports highlighting the severity of Australia’s skills shortage, Stevens said the problem remains confined to the resources sector and related industries, while wages growth has returned to rates seen prior to the economic downturn.

Meanwhile, the board predicts inflation will decline in the short-term, although the medium-term outlook looks less certain.

“Year-ended CPI inflation has been high, affected by the extreme weather events earlier in the year. As these effects reverse over the next couple of quarters, CPI inflation should decline,” Stevens said.

“But measures that give a better indication of the trend in inflation have begun to rise over the past six months, after declining for the previous two years… The board remains concerned about the medium-term outlook for inflation.”

Under these circumstances, Stevens said it was appropriate for monetary policy to exert a degree of restraint.

“The board judged that it was prudent to maintain the current setting of monetary policy, particularly in view of the acute sense of uncertainty in global financial markets over recent weeks,” he said.

Russell Zimmerman, executive director of the Australian Retailers Association, welcomed the decision.

“Not only will retailers breathe a sigh of relief at today’s rate hold decision; it might also mean the difference between keeping employees on the shop floor instead of having to review rosters and staffing levels,” he says.

Heather Ridout, CEO of the Australian Industry Group, adds: “The decision was a no-brainer.  It will be received with relief by the bulk of the Australian economy which is experiencing tough trading conditions.”

The news follows the latest Dun & Bradstreet survey revealing a third of executives rank interest rates as the primary influence on their business.

The survey was based on the responses of 1,200 business owners and senior executives across major industry sectors.

While businesses may have dodged another rate rise for now, Dun & Bradstreet chief executive Christine Christian says some sectors are nervous about the prospect of a rate rise.

“Retailers expect sales to remain weak as ongoing discounting campaigns by brick-and-mortar traders prove no match for the rising cost of living and subsequent anticipated rate rises,” Christian says.