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Reserve Bank leaves interest rates steady

Source: ABC News: 04 Apr 2012

The board of the Reserve Bank of Australia has left interest rates unchanged at 4.25 per cent at its monthly meeting today, as widely expected.

The decision leaves the official cash rate where it has been since December.

In a statement, Reserve Bank Governor Glenn Stevens said the board saw no need to alter the current level of rates given that growth was expected to remain around average, inflation was near the board's target range of 2 to 3 per cent, and commercial banks' interest rates were close to average.

But the board appeared to leave open the chance for a rate cut as soon as next month.

"At today's meeting, the board judged the pace of output growth to be somewhat lower than earlier estimated, but also thought it prudent to see forthcoming key data on prices to reassess its outlook for inflation before considering a further step to ease monetary policy," Mr Stevens said.

Mr Stevens said while domestic demand grew at its fastest pace in four years in 2011, output expanded at a slower-than-average rate.

The board took note of the strong Australian dollar, which remains high despite a decline in the terms of trade, a situation Mr Stevens has previously described as "a bit odd".

And it highlighted the "considerable structural change" in the economy as the mining investment boom gathers pace and non-mining sectors slow.

On the international front, the board noted the global economy did not appear to be experiencing a deep downturn; while several European nations would see "very weak" economic conditions this year, the United States economy was seeing moderate growth and China's economy was likely to expand at a "more measured and sustainable pace" in the future.

But he warned Europe would remain "a potential source of adverse shocks" in the economy and on financial markets until the region's banks and economies were put on a "sound footing".

Westpac chief economist Bill Evans said the board's decision this month appeared to be a close call, and upcoming inflation figures may be enough to swing the balance in favour of a cut next month.

"Even though the Governor notes that 'data on demand and output' will also influence the decision in May, we would be surprised if a benign inflation print does not ensure a rate cut," Mr Evans said in a note on the decision.

"The slowdown in momentum in the fourth quarter appears to be persisting in the first few months of 2012 with weak reports for retail sales, building approvals, confidence, both business and consumer, and the February employment report. We are also confident that the inflation print will be benign."

The Australian dollar declined against most major currencies after the announcement and at 3:10pm (AEDT) was buying 104 US cents, 85.3 Japanese yen, 78 euro cents, 64.9 British pence and $NZ1.26.

None of the economists surveyed by Bloomberg had expected the RBA to ease rates, despite figures suggesting inflation had dipped, thereby creating conditions favourable for a cut.

The monthly TD Securities-Melbourne Institute Inflation Gauge showed the annual rate of inflation had reached a two-year low of just 1.8 per cent, below the board's target.

Official inflation data from the Bureau of Statistics are due on April 24, and the RBA's board members will be closely watching those figures before their next meeting on May 1.

ABC News

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