RBA Retains 3% Overnight Cash Rate

  @ibtimesau on

As expected, the Reserve Bank of Australia (RBA) adopted a wait-and-see attitude and kept on Tuesday the overnight cash rate at 3 per cent. The central bank made the decision after release of economic data from the U.S. and China which showed some improvement.

RBA Governor Glenn Stevens cited the avoidance by the U.S. of a fiscal cliff, Chinese growth and the easing of financial pressures in Europe as the reasons why it retained the current key lending rate.

"Sentiment in financial markets has continued to improve, with risk spreads narrowing and funding conditions for financial institutions becoming more favourable," he said in a statement.

It was the RBA's first board meeting for 2013 after it cut four times a total 1.25 per cent from the benchmark lending rate in 2012.

Mr Stevens also pointed to local conditions such as growth close to trend in 2012, led by very large boosts in capital spending in the resources sector, as the basis for the anticipated policy decision.

He added that indicators point to resource investment about to reach a peak, giving the RBA more scope to strengthen other areas of demand. With Australia's yearly inflation rate within the RBA target range of 2 to 3 per cent, the central bank has room to reduce the overnight cash rate in the future, if needed, Mr Stevens said.

However, the RBA Tuesday decision will face more pressure if the country's jobless rate, scheduled to be released this week, will show a slight increase to 55 per cent.

"The board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target over time," the RBA governor said.

Following the RBA policy announcement, the dollar declined almost half a cent to a day's low of $US1.0398.

Joshua Williamson, senior economist of Citi, described the RBA policy as a glass-half-full approach to the Australian economy.

"What this is suggesting is that the Reserve Bank is quite happy to wait and give the previous interest rate cuts some time to actually gel with households and business," The Sydney Morning Herald quoted Mr Williamson.

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