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Reserve Bank's official interest rate kept on hold at 3.75pc
Tuesday, February 02, 2010
THE Reserve Bank board has surprised the market, and left home owners relieved, by leaving its official interest rate on hold today.
The market had expected that the Reserve Bank would increase its rate by 25 basis points.
The central bank board has decided to take stock of the recovering economy, even as core inflation remains above its target range and house prices continue to rise.
The Government has welcomed the board's decision to hold fire.
"Today's decision means a family with a $300,000 mortgage are still paying around $600 less than they were paying 18 months ago," Treasurer Wayne Swan told parliament today.
Reserve Bank governor Glenn Stevens said that economic conditions have "been stronger than expected, after a mild downturn a year ago".
"The effects of the fiscal stimulus on consumer demand have now faded, but household finances are being supported by strong labour market outcomes and a recovery in net worth," he said in a statement.
"Public infrastructure spending is now boosting demand, as is an upturn in housing construction. Investment in the resources sector is strong.
"The rate of unemployment appears to have peaked at a much lower level than earlier expected.
"Inflation has, as expected, declined in underlying terms from its peak in 2008, helped by the fall in commodity prices at the end of 2008, a noticeable slowing in private-sector labour costs during 2009, the recent rise in the exchange rate and a period of slower growth in demand."
Last October the Reserve Bank became the first central bank to increase its rate, as the Australian economy began growing again while other nations continued to grapple with the financial crisis.
By the end of the year, the Reserve Bank had increased its rate by a total of 75 basis points.
Mr Stevens said that lenders had raised rates at a faster rate than the Reserve Bank increased its cash rate.
"Lenders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point," he said.
"Since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being."
But he added that its cash rate would still have to be further tightened in order to keep inflation under control.
"If economic conditions evolve broadly as expected, the Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term."
A 25 basis point increase to the official rate would have added about $50 a month to a $300,000, 25-year home, according to research company Canstar Cannex.
Economists expect the Reserve Bank aims to move its cash rate towards a "neutral" setting, which is now considered to be around 4.5 per cent, by the middle of the year.
In other data out today, business confidence was dented in December by last year's interest rate hikes despite business conditions expanding in the December quarter.
- By Business Editor Edmund Tadros / news.com.au
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