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RBA keeps rate on hold as economy improves

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The Reserve Bank of Australia (RBA) kept the cash rate unchanged at three per cent at its March board meeting, citing a better local and overseas economic outlook.

In 2012 the central bank cut the cash rate four times, which RBA governor Glenn Stevens said was starting to have a positive effect on the economy.

In a statement accompanying the decision, RBA governor Glenn Stevens said most indicators suggest that economic growth in Australia is close to trend, helped mainly by an increase in investment in the resources sector.

“Looking ahead, the peak in resource investment is approaching, as it does, there will be more scope for some other areas of demand to strengthen,” Mr Stevens said on Tuesday.

“Dwelling investment appears to be slowly increasing, with higher dwelling prices and rental yields.”

Mr Stevens said conditions that were hurting global economic growth have eased in recent months.

“The United States is experiencing a moderate expansion and financial strains in Europe are considerably reduced compared with the situation through much of last year.

“Around Asia generally, growth was dampened by the earlier slowing in China and the weakness in Europe, but again there are signs of stabilisation,” Mr Stevens said.

JP Morgan economist Tom Kennedy said the RBA’s statement indicated the central bank’s view of the economy hadn’t changed since its February meeting.

“All in all, this statement basically says that the economy is a little bit soft but it is doing okay.

“I don’t think there is a great deal of new information in there.”

Mr Kennedy said the RBA made it clear it was willing to cut the cash rate if needed.

“I think that really is the key.

“If we do see a notable deterioration in the (economic) data, I think the RBA would be willing to step in and provide a more accommodative stance of policy,” he said.

Macquarie senior economist Brian Redican says the RBA is letting the previous rate cuts take effect on the economy but is ready to make further reductions if needed.

He says the local economy is more likely to spark another cash rate move than the global economy.

“The RBA is talking about moderate consumer spending growth, business investment peaking and unemployment rising,” Mr Redican said.

“So there’s still a clear easing bias there.”

Mr Redican expects the next cut by the central bank to occur in the first six months of 2013.