RBA holds rates steady for fourth month in a row

The big news this week was the Reserve Bank’s decision to hold rates steady at 3 per cent, which is a 49-year low. “Economic conditions in Australia have been stronger than expected a few months ago, with both consumer spending an exports notable for their resilience,” said RBA governor Glenn Stevens at the central bank’s board meeting this week. “Measures of confidence have recovered a good deal of ground. This suggests that the risk of a severe contraction in the Australian economy has abated.”

Indeed, recent economic figures have mostly been positive. According to the Australian Bureau of Statistics, retail sales in the second quarter expanded by 2 per cent, despite a 1.4 per cent contraction in June. Another industry survey found that manufacturing activity improved for the third month in a row during July, increasing by 6.1 points to 44.5 index points.

However, Mr Stevens hosed down the prospect of a sharp rebound in our economy. “The most likely outcome in the near term is a period of sluggish output, with consumer spending likely to slow somewhat and investment remaining weak,” he said.

Meanwhile, underlying inflation, which rose by 0.8 per cent in the June quarter to 3.6 per cent year on year, is expected to level off going forward, with one leading inflation gauge provider predicting mean inflation will return to the RBA’s 2-3 per cent target band in the first quarter of 2010.

This forecast was echoed by Mr Stevens: “Inflation is gradually moderating given the earlier decline in energy and commodity prices and the effects of weaker demand on prices and labour costs,” he said. “Given the current prospects for demand and output, this moderation should continue over the year ahead. The higher exchange rate over the recent months will assist in this moderation, at the margin.”

Looking ahead, the RBA will pay close attention to a number of economic indicators, including unemployment levels and home prices, to determine when the time is right to raise rates. A survey of job advertisements, conducted by one major Australian bank, shows job advertisements continued to fall in July, but at a slower pace than the rate recorded in earlier months. The job advertisements series fell by 1.7 per cent in July, which is a much slower rate of decline than June`s 6.7 per cent fall, but still down 51.9 per cent on the year to July.

The RBA will also continue to keep a close eye on housing prices in order to prevent low interest rates from fuelling a housing price bubble. According to the Australian Bureau of Statistics, home prices across our eight capital cities increased 4.2 per cent in the June quarter, but were still down 1.4 per cent on the year.

For the moment, it looks like the RBA is comfortable holding rates at 3 per cent but it will continue to keeping a close watch on any signs of overheating.

Infochoice.com.au