The central bank has decided to keep the cash rate unchanged this month and has opened the door for possible future cuts.
The decision was expected, with all 15 economists surveyed last week by AAP predicting the Reserve Bank of Australia (RBA) would keep rates on hold at 4.75 per cent on Tuesday.
The central bank’s board last raised the rate from 4.5 per cent in November 2010.
But the focus was on the statement accompanying the decision, in which RBA Governor Glenn Stevens indicated he was less concerned that inflation would accelerate.
“The path for inflation may now be more consistent with the two to three per cent target in 2012 and 2013,” he said.
That meant rate cuts were now on the table.
“An improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary,” Mr Stevens said.
UBS interest rate strategist Matthew Johnson said the RBA appeared to have downgraded its growth and inflation forecasts.
“I think that the bank has gone from thinking that things were too strong a couple of months ago, to being around trend now,” Mr Johnson said.
“If there’s a further deteriorating, they’ll ease policy.”
He said the statement prompted investors to buy bonds, on expectations that the central bank may soon cut the cash rate.
The December 10-year bond futures contract rose to 95.985 (implying a yield of 4.015 per cent) from 95.96 (4.04 per cent) just before the RBA released its statement at 1430 AEDT.
The Australian dollar dropped to a one-year low 94.65 cents after the statement.
Mr Johnson said Mr Stevens’ statement suggested the bank would be watching unemployment figures very closely, as a gauge of inflationary pressure on the economy.
“But we’re a few months away from having to make that decision.”
Mr Stevens said conditions in global financial markets continued to be “very unsettled, with uncertainty increasing about both the prospects for resolution of the sovereign debt and banking problems in Europe, and the outlook for global economic growth.”
However, economic activity in China and Asia was continuing to expand, he said.
CommSec chief economist Craig James said Mr Stevens’ statement showed the RBA had become more open to the possibility of lower rates.
“For the first time since the global financial crisis, the Reserve Bank has opened the possibility of rates being trimmed to support the economy,” Mr James said.
He said the focus now shifts to October 26, when the Australian Bureau of Statistics releases consumer price index (CPI) data for the September quarter.
The CPI is a key measure of inflation and is used by the central bank in setting its monetary policy.
HSBC chief economist Paul Bloxham said the RBA’s statement was more dovish than recent ones.
“The RBA is keeping a steady hand on the wheel and is more concerned with the inflation outlook,” he said.
Mr Bloxham noted that while the European and US economies were slowing, Asia, and particularly China, were going strong or, at least, easing at a steady rate.
