Interest rates left on hold, with Reserve Bank delaying an inevitable rise in loan repayments
Interest rates have been left unchanged for another month, but a “turning point” in the global economy may soon put pressure on the Reserve Bank to act.
Meeting today, the Reserve Bank Board decided to leave the cash rate at 3 percent due to the ongoing affects of the global economic downturn.
But in making its decision, the Board noted strong growth in the Chinese economy and stronger than expected conditions in Australia on the back of consumer spending, exports and business investment.
“With considerable economic policy stimulus in train around the world, the global economy is resuming growth,” a statement from the Reserve Bank says.
“The major economies appear to be approaching a turning point.”
With forecasts of most growth next year, economists are predicting interest rates will rise to cope with inflation.
“Underlying inflation should continue to moderate in the near term, but the likelihood of inflation being persistently below the target now looks low,” the Reserve says.
The Reserve has hinted it may soon need to act on rates, saying sentiment in global markets continues to improve.
However, it adds that the effects of the weak economy will continue to be felt.
“This constitutes one of the main remaining risks to the global expansion,” the statement says.
“For the recovery to be durable, continued progress in restoring balance sheets is essential.”
BUSINESS INVESTMENT RETURNS
The Reserve has tipped business investment to rise as well, pointing to various government stimulus policies as part of the reason.
However, it adds that some sectors will be limited in their ability to invest due to financing constraints.
“But overall, it now appears that investment may not be as weak over the year ahead as earlier expected,” the Reserve says.
According to the Reserve Bank, the housing market and consumer demand will begin to improve, helping to support economic growth going into 2010.
Although citing a drop in the number of work hours, the Reserve Bank is optimistic about the unemployment rate.
In its statement, the Bank says the jobless rate has not risen as far as expected.
While credit growth has stalled and housing credit remains “solid”, the Reserve Bank says businesses are borrowing less due to tighter lending standards.
“Large firms have had good access to equity capital and access to debt markets appears to be improving, helped by the better-than-expected economic conditions and increased willingness on the part of investors to accept risk,” the Bank says.