Australia Keeps Interest Rate Unchanged at 3% on Improved Global Economic Outlook

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By Jerin Mathew | February 5, 2013 4:06 PM EST

RBA keeps cash rate unchanged

Australia has left its benchmark cash rate unchanged at three percent as expected by many economists due to improved outlook on global economy despite a below-average global growth forecast.

"Global growth is forecast to be a little below average for a time, but the downside risks appear to have abated, for the moment at least," Reserve Bank of Australia (RBA) Governor Glenn Stevens said in a statement.

"At today's meeting, taking into account the flow of recent information and noting that there had been a substantial easing of policy as a result of previous decisions, the Board judged that it was prudent to leave the cash rate unchanged".

Between May and December in 2012, the central bank cut the cash rate four times, reducing the rate by 1.25 percentage points in total.

Stevens added that "an accommodative stance of monetary policy is appropriate" with inflation expected to stay in line with target and growth likely to be a little below trend over the coming year".

Earlier, the country reported a narrower December trade deficit of A$0.43bn ($0.45bn, £0.28bn) on a seasonally adjusted basis, compared to a deficit of A$2.79bn in November. Exports of goods and services rose by three percent while imports slumped by six percent.

RBA noted that the US has avoided a fiscal contraction and the financial worries in Europe have reduced recently. In addition, Australia's key trade partner China has recovered from a slowdown and is experiencing stabilised growth along with major Asian economies.

Some commodity prices have firmed over recent months, according to RBA. The export growth in December was primarily due to sharp increase in volumes of iron ore and coal together with rebounding prices for iron ore in late 2012.

Investor sentiment has continued to improve in the country with interest rates for companies remaining attractive.

"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," Stevens added.

"There are indications of a prospective improvement in dwelling investment, with dwelling prices moving higher, rental yields increasing and building approvals higher than a year ago. Exports of natural resources have been strengthening, though recent bad weather is affecting some shipments."

Further, economists at Commonwealth Bank expected the country's natural resources sector, especially iron ore and coal, to play a major role in the economic growth in 2013.

"A recovering Asia Pacific economy led by China and Japan should help underpin already recovering prices in these key commodities in 2013. This factor coupled with continuing increase in the capacity of the Australian iron and coal industries to continue to crank up export volumes of these commodities on the back of the massive investment in these sectors in recent years should help lift the value of exports of iron ore and coal over 2013 and beyond," they said.

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