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Australia central bank keeps key rate unchanged

Tuesday 6th July 2010

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The Reserve Bank of Australia kept its overnight cash target rate unchanged at 4.5%, as expected, and said borrowing costs have returned to their average levels of the past decade, which is appropriate pending more data on demand and prices.

The central bank today kept its key rate unchanged for a second month, according to a statement published on its website. It said the global economy has been growing at its trend pace in recent months, with very strong growth in Asia and Latin America, while Europe’s economies face a more uncertain outlook and the U.S. recovery restrained by a tepid improvement in the labour market.

In China, the biggest market for Australia’s exports, growth is “now starting to moderate to a more sustainable rate,” Governor Glenn Stevens said. “Commodity prices are off their peaks but those most important for Australia remain at very high levels, and the terms of trade are approaching their peak of two years ago.”

The high terms of trade will stoke incomes and demand, ensuring output growth in Australia is on trend, even as the impact of previously expansionary monetary policy diminishes.

The RBA began hiking rates last October, the first such move by a Group of 20 nation. At home, consumption spending is growing only modestly, reflecting cautious households, though business investment is expected to pick up over the next 12 months, Stevens said. Australia managed to skirt the global recession last year, helped by demand from China for its raw materials and the relative strength of its lenders.

The Australian dollar rose to 84.04 U.S. cents from 83.69 cents immediately before the statement was released. The RBA has hiked the benchmark rate six times since October from the lowest in about five decades.

Credit to businesses has stabilised, though some sectors still face difficulty borrowing money. Credit for housing, though, “has continued to expand at a solid pace,” while the pace of house price increases abates.

The labour market has continued to firm and there has been some growth in wages, Stevens said.

He predicted underlying inflation would be in the upper half of the target zone over the next year, with the consumer price index rising above 3% in the near term on higher utility charges and an increase in tobacco tax.

“The current setting of monetary policy is resulting in interest rates to borrowers around their average levels of the past decade,” Stevens said. “Pending further information about international and local conditions for demand and prices, the board views this setting of monetary policy as appropriate.”

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