Oz holds interest rates

The Reserve Bank of Australia has defied expectations by leaving its key interest rate on hold while waiting for the full effect of previous rate cuts to spur the economy. The dollar soared on the news...

The central bank left the cash rate at 3.25 per cent, the lowest since 1964. Analysts had forecast a 25 basis-point cut.

''In Australia, demand has not weakened as much as in other countries and, on the basis of currently available information, the Australian economy has not experienced the sort of large contraction seen elsewhere,'' RBA Governor Glenn Stevens said in an accompanying statement.

''The Australian financial system remains strong and the monetary policy transmission process is working to deliver large reductions in interest rates to end borrowers.''

''It's a sunny statement,'' said Su-Lin Ong of RBC Capital Markets. ''We they think that at this juncture they've done enough.''

Ms Ong said nothing about the decision changes the fundamental outlook for the RBA or the Australian economy.

''There's no denying that the global backdrop has weakened," she said. ''I still think it was a close decision today."

The share market was unmoved by the news, falling only a few points on the announcement, before rising again. Both the benchmark S&P/ASX200 and All Ordinaries indexes are down 1.5 per cent this afternoon.

Today's pause comes after the Reserve Board slashed four per centage points from the interest rate since September in an effort to stop the global recession from taking hold in Australia.

Mixed signals

The RBA noted that the Federal Government's stimulus packages - totalling more than £23.5 billion - are yet to work their way through the economy, while interest rates are already about as low as they have ever been.

''Market and mortgage rates are at very low levels by historical standards and business loan rates are below recent averages, reducing debt-servicing burdens considerably,'' Mr Stevens said.

''Together with the substantial fiscal initiatives, the cumulative decline in interest rates will provide significant support to domestic demand over the period ahead. On this basis, notwithstanding evident economic weakness at present, the Board judged that the stance of monetary policy was appropriate for the moment.''

In recent weeks, a slew of economic data painted a conflicting view of the economy, with higher-than-expected fourth-quarter spending but sharply lower profits and inventories.
 
Although the RBA chose not to act this month, forward-looking views of the economy suggest Australia may not be able to avoid the global recession which is dragging down the US, European and many Asian economies.

The Australian dollar jumped on the RBA's decision to leave rates unchanged, viewing the statement as a sign of confidence in the resilience of the local economy. It recently bought 63.95 US cents, up more than half a US cent on its level just before the RBA announcement.

More cuts to come

Today's RBA pause, though, may not last long.

"The RBA admits there is a lot of weakness in the global economy but believes there is plenty of stimulus in the system and will keep rates under review,'' Nomura's economist Stephen Roberts told Reuters. ''My guess it's a temporary pause before cutting again next month. Ultimately I think the rates will go down to around two per cent."

Compared with its overseas counterparts, the RBA has a lot more room to cut rates.

The US Federal Reserve's benchmark rate is already close to zero, the Bank of England's rate is at its lowest since its formation in 1694 and the European Central Bank will probably cut its main rate later this week to 1.5 per cent, the lowest level in a decade, according to analysts' forecasts.

The next key figure for the local economy will come out tomorrow when the Australian Bureau of Statistics releases fourth-quarter GDP growth figures tomorrow, revealing whether the economy contracted in the final three months of 2008.

A revision downward to the third quarter's 0.1 per cent meagre rise would mean Australia has been in recession since the middle of last year if the December quarter growth rate also came in negative.

Source: www.theage.com.au