RBA keeps open mind on rate cuts

4 Sep 2012, 4:22 pm   -   Source: AAP
The Reserve Bank of Australia is expected to keep its official interest rate on hold on Tuesday. (AAP)

The Reserve Bank of Australia is expected to keep its official interest rate on hold on Tuesday. (AAP)

The RBA has kept the cash rate on hold at 3.5 per cent, as expected, and has said little to indicate a definite change in direction by year's end.

The central bank is keeping an open mind on a rate cut closer to year's end, after it kept its finger off the interest rate button on Tuesday.

The Reserve Bank of Australia (RBA) left the cash rate at 3.5 per cent after its monthly board meeting - a decision expected by all 13 economists surveyed by AAP last week.

RBA governor Glenn Stevens said the effect of rate cuts in May and June were still to work their way through the economy.

"As a result of the sequence of earlier decisions, interest rates for borrowers are a little below their medium-term averages," Mr Stevens said in an accompanying statement after the rates decision.

"The impact of those changes is still working its way through the economy, but dwelling prices have firmed a little and business credit has picked up this year."

Mr Stevens said the outlook for global economic growth had softened after a pick-up in the early months of 2012.

Europe's economy was still contracting, while US growth maintained a modest pace, and China's economy remained strong, albeit moving at a slower pace than in previous years, he said.

HSBC chief economist Paul Bloxham said the RBA's view on the domestic economy was more hawkish than the market's, and the central bank appeared unconvinced by recent concerns that Australia's mining boom might be over.

Concern about falling commodity prices has led to miners BHP Billiton and Fortescue shelve or defer major projects in recent weeks, raising debate about whether the end of the mining boom had ended.

Mr Bloxham said the RBA was satisfied with the current rate of inflation and economic growth, despite the worsening global outlook.

"It really fits with our view that they still feel like they are ahead of the game a little, having cut rates earlier," he said.

CMC Markets chief market strategist Michael McCarthy said the RBA board was expressing a less panicked tone in relation to Europe compared to previous meetings.

"They made it clear that the main drivers of the interest rate cuts in May and June were the international threat, specifically Europe," he said.

A more positive reading on the euro zone implied the RBA was not guaranteed to cut the cash rate again in 2012, Mr McCarthy said.

JP Morgan economist Ben Jarman said the central bank had taken a more guarded view on Chinese and domestic growth.

"With China, they've had to admit that the most recent data has been a bit softer in tone," he said.

The RBA also acknowledged that consumer data in Australia had become weaker in recent months, Mr Jarman said.

Australian National Retailers Association chief executive Margy Osmond said a September rate cut could have provided more incentive for consumers to spend at Christmas.

Ms Osmond said that rate cuts took some months to filter through to households.

"It used to be more of an instant hit, but now consumers seem to need a month or two to absorb the impact of a cut on their household income," she said.

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