The Reserve Bank left the cash rate on hold at 3.00 per cent at its February board meeting. Source: AAP
THE Reserve Bank of Australia (RBA) has kept the cash rate at three per cent, saying that fears about global economic growth have abated.
The decision was widely expected by the market, especially after the release of better economic data from China and the US in recent weeks.
The previous interest rate move was a quarter of a percentage point reduction in December. In 2012 the central bank cut the cash rate by total of 1.25 percentage points.
In a statement accompanying the decision, RBA governor Glenn Stevens said the fiscal cliff in the US has been avoided, Chinese growth had improved and the financial pressures in Europe have eased.
"Sentiment in financial markets has continued to improve, with risk spreads narrowing and funding conditions for financial institutions becoming more favourable," Mr Stevens said after the RBA's first board meeting for the year.
"In Australia, most indicators available for this meeting suggest that growth was close to trend in 2012, led by very large increases in capital spending in the resources sector, while some other sectors experienced weaker conditions.
"Looking ahead, the peak in resource investment is approaching. As it does, there will be more scope for some other areas of demand to strengthen."
Mr Stevens said the full impact of the four interest rate cuts in 2012 would take more time to become apparent.
"There are early indications of a pick-up in dwelling construction; and savers are starting to shift portfolios towards assets offering higher expected returns," he said.
"On the other hand, the exchange rate remains higher than might have been expected, given the observed decline in export prices, and the demand for credit is low, as some households and firms continue to seek lower debt levels."
Three per cent is the lowest the RBA's cash rate has been since early October 2009, during the global financial crisis.
Mr Stevens said that, with annual inflation currently within its target band of two to three per cent, the RBA had room to cut the cash rate further if needed.
"The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand," he said in the statement.
HSBC Australia chief economist Paul Bloxham said it appeared the RBA was waiting for recent interest rate cuts to flow through to the economy.
"The RBA is still waiting to see the effects of the previous cuts they have delivered and that is clear in the statement," he said.
"It looks as though they are going to stay on hold for the moment."
Mr Bloxham said that while the RBA's statement left the possibility of further rate cuts open, he did not expect any further reductions in the cash rate this year.
"I think they have hinted at a mild easing bias but we think the easing cycle is done," he said.
He said global economic conditions had improved and believed the rate cuts delivered in 2012 would provide a boost to the domestic economy over the coming months.
"The global economy has stabilised, the China story has picked up and policy settings in Australia are already conducive to supporting growth," he said.
The three per cent cash rate will probably remain in place for the rest of the year as Europe, the US and Asia show evidence of recovery, Commonwealth Bank's chief economist Michael Blythe said.
"With low inflation and plenty of risks in Europe and elsewhere, it's unlikely there will be any need to start lifting rates any time soon," Mr Blythe told AAP.
"We're at a low and that low will be in place for an extended period, I would think really through 2013."
He said the determinant would be whether the Reserve Bank would be successful in engineering a growth rotation away from the mining sector.
"As the mining story winds down, can we gets bits of the non-mining economy moving?
"Based on what they're saying today, that seems to be happening," Mr Blythe said.
UBS interest rate strategist Matthew Johnson said while the decision to put rates on hold was expected, the bank's risk outlook was interesting.
"The RBA is saying this is going to be a generational project in terms of fixing the fiscal situation, so the risks are going to be around for a while," he said.
"They have abated for the moment but they're going to be with us for some time."
Mr Johnson said the RBA made it clear that there's scope to ease policy if it's required to support demand.
"So maybe they're putting the focus now on demand and we should look for them to ease, not around the inflation reports but around the time GDP comes out in March, the last month's of the quarter," he said.
Mr Johnson added that the bond futures market moved slightly higher on the announcement.
Futures market are now pricing in a 47 per cent chance of an interest rate cut in March, compared to a 57 per cent chance prior to Tuesday's cash rate announcement.
RBC capital markets fixed interest strategist Michael Turner said the statement shows the RBA is a little more upbeat about the local and global economy.
"There's a slightly more positive tone around the globe, as you'd expect. They may be a tiny bit more confident with certain parts of the domestic economy, in particular the housing market," he said.
"More importantly they are looking at below trend growth and inflation for this year, giving them scope to ease, should they deem it necessary.
"We're not sure there is much in this statement that represents a change in their thinking since December."
Mr Turner said he is not expecting another interest rate cut until the April to June quarter of 2013.
"Our view since the December cut is that they will need to see some domestic data prints on the low side of expectations for a few weeks, if not for a couple of months, for them to put another rate cut on the table," Mr Turner said.
