Interest rates unchanged despite calls for cut

The Reserve Bank has kept the official interest rate unchanged at 4.25%, despite calls for it to be cut, saying the decision was appropriate in light of growth, inflation and lending rates.

RBA governor Glenn Stevens said while the world economy will grow at a below-trend pace this year, there is no evidence to suggest that a deep downturn is occurring.

“Several countries in Europe will record very weak outcomes, but the US economy is continuing a moderate expansion,” Stevens said in a statement yesterday.

“Growth in China has moderated… and is likely to remain at a more measured and sustainable pace in the future.”

“Conditions around other parts of Asia softened in 2011, partly due to natural disasters, but are not showing signs of further deterioration.”

However, Stevens said European banks and sovereigns are yet to achieve a sound footing, warning Europe will remain a “potential source of adverse shocks” for some time yet.

With regard to Australia, Stevens said growth in domestic demand ran at its fastest rate in four years in 2011, driven by private spending.

“Nonetheless, the balance of recent information suggests that output growth was somewhat below trend over the year. There are differences in performance between sectors,” he said.

“Labour market conditions softened during 2011, though the rate of unemployment has been little changed for some time.”

According to the RBA, interest rates for borrowers remain close to their medium-term average, and credit growth remains modest. Meanwhile, inflation was around 2.5% in 2011, Stevens said.

“Consumer Price Index inflation was higher than that but will fall over the next quarter or two. It is currently expected that inflation will be in the 2-3% range over the coming one to two years,” he said.

At its next meeting, Stevens said the RBA board will have the opportunity to reassess the outlook for inflation, taking into account data on demand and output, and information on prices.

“The board eased monetary policy late in 2011,” Stevens said.

“Since then, its judgment has been that, with growth expected to be close to trend, inflation close to target and lending rates close to average, the setting of monetary policy was appropriate.

“The board’s view was also that, were demand conditions to weaken materially, the inflation outlook would provide scope for easier monetary policy.”

The news comes despite calls from business groups and unions for the cash rate to be cut, with the Australian Chamber of Commerce and Industry (ACCI) saying there is a “chronic lack of confidence”.

An ACCI survey released earlier this week shows trading conditions, sales, profitability and hiring intentions are either at contractional levels or below their five-year averages.

“We don’t think there could be a clearer case for business requiring a rate cut at the moment,” ACCI director of economics and industry policy Greg Evans said on Monday.

“Monetary policy is far too restrictive.”

The RBA’s cash rate has remained at 4.25% since it was last cut in December last year.