Reserve holds back on rates

04/03/2009 - 22:00

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ECONOMISTS have described the central bank's decision to hold the official cash rate this week as a pause to the rate cutting cycle.

Reserve holds back on rates

ECONOMISTS have described the central bank's decision to hold the official cash rate this week as a pause to the rate cutting cycle.

The Reserve Bank of Australia left the cash interest rate at 3.25 per cent, halting a series of rate cuts since September last year.

The decision signals the RBA does not see the Australian economy being immediately threatened with the large contractions already being experienced in other major industrial countries.

But it remains ready to move again if the current weakness builds momentum and the global economy continues to falter, economists said.

RBA governor Glenn Stevens said current monetary policy settings were appropriate for the moment in an economy where inflation was likely to decline and there had been major actions taken by the bank and the federal government.

The federal government has announced $52 billion worth of fiscal stimulus packages in two parts, in late 2008 and in February.

Commonwealth Bank senior economist John Peters said recent economic data - such as business capital spending, retail sales and construction work - showed Australia was performing better than its larger peers.

"The economy here is showing a lot more resilience than certainly the North American, European and Japanese economies," he said.

"It looks like the economy so far has dodged the recessionary bullet."

But RBC Capital Markets senior economist, Su-Lin Ong, said a likely ongoing slowdown in the global economy would force the RBA to cut rates to 2.5 per cent - by another 75 basis points - later this year.

"They are leaving ammunition just in case the global backdrop takes another turn for the worse, which is looking inevitable," she said.

"This is a pause, it's not the end of the easing cycle."

ANZ Banking Group chief economist Saul Eslake said an expected rise in the jobless rate would also be a major consideration in future rate decisions.

Treasury's latest estimate is for an unemployment rate of 5.5 per cent by June this year and 7 per cent by June 2010, compared to a current 4.8 per cent.

"Tactically, they probably do want to be in a position where they can respond as the unemployment rate eventually reaches 5 or 6 per cent," Mr Eslake said.

"If they end up cutting the cash rate to 1 per cent before unemployment has started to rise a lot then they will be in a position where it looks as though they are sitting there not doing anything when unemployment goes up."

Mr Eslake expects the cash rate to eventually reach a cyclical low of 2.5 per cent.

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