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RBA Keeps Cash Rate On Hold; Sees Period Of Interest Rate Stability

Australia Interest Rate 020414

The Reserve Bank of Australia on Tuesday decided to retain its benchmark cash rate at a record low of 2.5 percent and observed that a period of stability in interest rates may be "the most prudent course" at present.

The bank's monetary policy "is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target," Governor Glenn Stevens said in a statement today. "On present indications, the most prudent course is likely to be a period of stability in interest rates."

The Reserve Bank Board expects inflation to be somewhat higher than forecast three months ago, but still consistent with the 2-3 percent target over the next two years, Stevens noted. Higher inflation, currency depreciation, and house price gains may be the reason behind the Reserve Bank's decision to refrain from further monetary easing.

The RBA has reduced the cash rate by a cumulative 225 basis points since November 2011 to help the economy sustain demand in areas outside the resources sector in view of fading support from the mining boom.

Stevens pointed out that the exchange rate had declined further, which, if sustained, would assist in achieving balanced growth in the economy. The RBA expects growth to remain below trend for a time yet and unemployment to rise further before it peaks.

Beyond the short term, growth is expected to strengthen, helped by continued low interest rates and the lower exchange rate, Stevens said.

He noted that as per the available information, there has been a slightly firmer consumer demand which foreshadows a solid expansion in housing construction.

The central bank observed "the near-term prospects for business investment remained subdued, with resources sector investment spending set to decline significantly, considerable structural change occurring and lingering uncertainty in some areas of the business community."

The bank also expressed concerns about the ongoing employment and wage conditions in Australia. "The demand for labour has remained weak and, as a result, the rate of unemployment has continued to edge higher. Growth in wages has declined noticeably," Stevens said in the statement.

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