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The Reserve Bank has delivered some badly needed relief to mortgage holders, deciding today to leave official interest rates on hold.

For the first time since February, the RBA board did not use its monthly meeting to lift rates which now stand at 4.5 per cent.

In a statement, bank governor Glenn Stevens said the issues around sovereign debt in Europe and its impact on financial markets were a major reason behind the move.

He said the impact of these on the wider economy were still to be determined, arguing global growth is still expected to be around trend for the rest of this year.

But Mr Stevens signalled interest rates were likely in the future on the back of the return of the mining boom.

“In Australia, with the high level of the terms of trade expected to add to incomes and demand, output growth over the year ahead is likely to be about trend, even though the effects of earlier expansionary policy measures will be diminishing,” he said.

“Inflation appears likely to be in the upper half of the target zone over the next year.

Consistent with that outlook, and as a result of actions at previous meetings, interest rates to borrowers are around their average levels of the past decade, which is a significant adjustment from the very expansionary settings reached a year ago.”

The decision followed new figures from the Australian Bureau of Statistics which showed retail sales growing 0.6 per cent in April and a 14.8 per cent collapse in dwelling approvals.

However, the retail sales – while stronger than expected – were pushed up by food sales which jumped 1.3 per cent. Once this sector, which accounts for 40 per cent of all sales, is excluded retail was up just 0.1 per cent.

Other ABS figures showed government spending is holding up the economy and will add about 0.8 percentage points to tomorrow’s GDP result. Without that burst, the economy may have actually contracted in the March quarter.

CommSec chief equities economist Craig James said the figures showed the RBA had no option but to leave rates where they are for some time to come.

“Given the latest round of data, there are good reasons for the Reserve Bank to leave rates on hold for the next few months,” he said.

“Not only are retail sales holding at very weak levels, but the housing sector is showing signs of consolidation.”

Treasurer Wayne Swan says the Reserve Bank’s decision to leave the official cash rate unchanged is a “welcome relief”.

“This news will be welcome relief to Australian families and businesses around the country, who are of course doing it tough,” Mr Swan told parliament minutes after the decision was announced.

The national accounts for the March quarter are due for release on Wednesday.

“I have every confidence that with right polices in place, our economy can continue to be one of the best in the world over coming years,” Mr Swan said. Consistent with that outlook, and as a result of actions at previous meetings, interest rates to borrowers are around their average levels of the past decade, which is a significant adjustment from the very expansionary settings reached a year ago.”

“Not only are retail sales holding at very weak levels, but the housing sector is showing signs of consolidation.”

“Source  :  www.thewest.com.au

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THE market odds have moved firmly against an interest rate rise by the Reserve Bank in February.

The sharp change in direction, which began on Tuesday after the central bank revealed its December 1 meeting minutes, accelerated yesterday following a speech by RBA deputy governor Ric Battellino.

Mr Battellino signalled that rates could stay on hold when the RBA next meets in February, saying the “overall stance” of monetary policy was “back in the normal range”.

His comments, at the Australian Finance & Banking Conference in Sydney, surprised the markets, triggering a slump in the Australian dollar to below US90.

Last night the dollar was hovering around US89.70.

Financial market betting on a 25-basis point rate hike in February retreated from a 67 per cent chance to 45 per cent.

Mr Battellino said that although the cash rate still seemed “unusually low” at 3.75 per cent, monetary policy was back “in the normal range” because the current level of deposit, housing and business lending rates made the cash rate equivalent to a “before the crisis” level of 4.75 per cent.

“Taking these considerations into account, it would be reasonable to conclude that the overall stance of monetary policy is now back in the normal range, though in the expansionary segment of that range,” he said.

The deputy governor’s remarks were made half an hour after the Australian Bureau of Statistics revealed economic growth in the September quarter was weaker than expected.

The national accounts showed GDP edged up just 0.2 per cent in the three months to September, half the pace of growth expected by the market, for an annual rate of 0.5 per cent.

The main drag on growth was a slump in exports which coincided with a jump in imports.

However, demand from households, businesses buying more equipment and government investment was solid.

ANZ acting chief economist Warren Hogan said the GDP figures indicated there was little urgency to get official interest rates back to a neutral setting, adding that Mr Battellino’s comments had “dealt a solid blow” to the prospect of substantial gains in the cash rate over coming months.

“Put another way, the emergency setting for interest rates has now been removed and policy will be adjusted as and when required by economic conditions,” he said.

Westpac chief executive Gail Kelly told reporters after the bank’s annual meeting in Melbourne yesterday that the RBA was likely to raise rates “very carefully” in 2010.

However, she said the official cash rate was not quite yet at a “normal” level.

Mrs Kelly said she remained cautious about the economic outlook while the bank’s chairman Ted Evans said a “V-shaped” recovery for Australia was unlikely.

“It will be a long recovery and that’s what our plans are based on,” he said. 

Source  :  www.news.com.au

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