Reserve Bank keeps cash rate on hold despite low demand for credit

The cash rate has been left unchanged at 3%, in line with economists’ predictions, although the Reserve Bank said the exchange rate remains “higher than might have been expected” while demand for credit is low.

According to RBA governor Glenn Stevens, global growth is forecast to be a little below average “for a time”, but said the downside risks appear to have lessened over recent months.

“The United States is experiencing a moderate expansion, and financial strains in Europe are considerably reduced compared with the situation through much of last year,” Stevens said.

“Growth in China has stabilised at a fairly robust pace. Around Asia generally… there are signs of stabilisation.

“In Australia, most indicators available for this meeting suggest that growth was close to trend over 2012, led by very large increases in capital spending in the resources sector, while some other sectors experienced weaker conditions.

“The peak in resource investment is approaching. As it does, there will be more scope for some other areas of demand to strengthen.”

As in previous months, Stevens said while there is moderate growth in private consumption spending, a return to the very strong growth of some years ago is unlikely.

“Inflation is consistent with the medium-term target, with both headline CPI and underlying measures at around 2.25% per cent on the latest reading,” he said.

“Looking ahead, with the labour market softening somewhat and unemployment edging higher, conditions are working to contain pressure on labour costs.

“Moreover, businesses are focusing on lifting efficiency under conditions of moderate demand growth. These trends should help to keep inflation low.

“The bank’s assessment remains that inflation will be consistent with the target over the next one to two years.”

Stevens said while there was a significant easing in monetary policy during 2012, the full impact of that will take more time to become apparent.

“[However,] there are signs that the easier conditions are having some of the expected effects,” he said.

“On the other hand, the exchange rate remains higher than might have been expected… and the demand for credit is low, as some households and firms continue to seek lower debt levels.”

“The board’s view is that with inflation likely to be consistent with the target, and with growth likely to be a little below trend over the coming year, an accommodative stance of monetary policy is appropriate.

“The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand.”