RBA leaves rates on hold 1

Reserve Bank of Australia keeps the official cash rate on hold at 4.75 percent despite rise in inflation

August 2, 2011

Delays in coal production and ongoing
household caution has seen the Reserve Bank of Australia (RBA) leave the official cash rate on hold at 4.75 percent for the ninth straight month today.

The Board’s decision comes despite Australia’s CPI increasing by 0.9 percent in the June quarter as a result of significant price rises for fruit, furniture and fuel.

RBA Governor Glenn Stevens says while the global economy is continuing to expand, the pace of growth slowed over the quarter.

"The supply-chain disruptions are now gradually abating and commodity prices have softened of late, though they generally remain high," Stevens says.

He says Australia’s terms of trade are now at "very high levels" and investment in the resources sector is picking up.

"The resumption of coal production continues, but a full recovery of flood-affected production now looks unlikely before early next year."

Commenting on Australia’s two-speed economy, Stevens says cautious behaviour by households and the high Australian dollar are having a dampening effect on those sectors not linked to the mining industry.

"Precautionary behaviour by households also looks likely to keep some areas of demand weaker in the near term than earlier expected," he says.

Year-ended CPI inflation has been high, affected by the extreme weather events earlier in the year.

Stevens says as these effects reverse over the next couple of quarters, CPI inflation should decline.

"But measures that give a better indication of the trend in inflation have begun to rise over the past six months, after declining for the previous two years," he says.

"While they have, to date, remained consistent with the 2–3 per cent target on a year-ended basis, the Board remains concerned about the medium-term outlook for inflation."

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