Rates On Hold Again At 4.75pc

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August 1st, 2011

THE Reserve Bank of Australia has kept the official interest rate on hold, citing the "acute sense of uncertainty in global financial markets in recent weeks" for its decision.

At its monthly board meeting today, the central bank left the rate at 4.75 per cent for the ninth month in a row.

The last time the RBA decided to lift rates was in November 2010.

New figures released recently had some market observers speculating the RBA could hike up interest rates as early as today, prompting an outcry from industry and business groups that doing so could result in the loss of jobs and the closure of some businesses around the country.

In a statement released this afternoon, RBA governor Glenn Stevens said the board was concerned about Australia's inflation rate, which had increased to the current 3.6 per cent, above the central bank's target rate of between 2 to 3 per cent.

Mr Stevens said the board had been hopeful the inflation rate would decrease over the next couple of quarters, however recent indicators were painting a different picture.

"…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," Mr Stevens said.

"While they have, to date, remained consistent with the 2-3 per cent target on a year-ended basis, the Board remains concerned about the medium-term outlook for inflation."

He added that the board had considered lifting rates today but decided against it after the recent economic turmoil in the US and Europe.

Commonwealth Bank senior economist Michael Workman said the decision to keep the cash rate on hold was expected.

``They judged it was prudent to keep the current setting of monetary policy, mainly because of the uncertainty of global financial markets in recent weeks,'' he said.

``So that's maybe giving you a clue that if the uncertainty is removed in the coming months, then they will be discussing the need for rate rises.''

Mr Workman said a lot of the local economic data, such as the high June quarter inflation figure that were released last week, would put upward pressure on interest rates.

He is still expecting the next rate rise to be in November this year.

``Most of the analyst do expect a rate rise by the end of the year,'' he said.

''(Westpac chief economist) Bill Evans is still calling for a rate cut at the end of the year but we will have to wait to see if his scenario is correct.''

Mr Workman is expecting the September quarter inflation figures, due out on October 26, to be high, prompting a rate increase by the RBA.

St George Bank chief economist Besa Deda said the RBA seemed to be concerned about the strength of the global economy.

``They make a mention of China and the slowdown. They're obviously worried about the world economy,'' she said.

``I don't think that has died down in this board meeting. If anything it seems to have elevated a little bit.''

She said the central bank was probably also concerned the local economy was recovering more slowly than expected from the summer floods in Queensland.

``The recovery from the floods in terms of coal production is taking longer,'' Ms Deda said.

``This obviously will mean gross domestic product won't be as strong as formerly anticipated.''

She said tighter financial conditions flowing from the surging local currency may have also contributed to the decision to keep interest rates steady.

``We know that the exchange rate up around these levels is higher than what the RBA had relied on in their May forecast,'' she said.

``A high exchange rate is obviously having a tightening impact on the economy.''

The Australian dollar hit a peak of 110.81 US cents on July 27, its highest level since the fixed exchange rate era ended with its float in December 1983.

The local unit dropped almost half a US cent after the rates decision and was trading at about 109.30 US cents in late afternoon trade.

ANZ senior economist Katie Dean said Mr Stevens' statement suggested the central bank was still contemplating a rate rise.

``The RBA has clearly discussed the possibility of raising rates and has decided not to do so in this meeting,'' Ms Dean said.

``While they are quite concerned about the inflation outlook, they're also concerned about disrupting Australian economic growth, given the heightened global uncertainties at the moment.''

She said the futures market moved towards favouring an interest rate cut over a rate hike shortly after the RBA's decision.

``The market is certainly not convinced that the RBA's going to go (and raise the cash rate) anytime soon,'' Ms Dean said.

``I think there's still a very good chance that rates could rise before the end of this year but as to when that occurs - it looks like it may be later rather than sooner.''