RBA holds key rate at 4.75%, says growth less than forecast

Australian central bank holds key rate at 4.75%, says growth weaker than forecast

July 5 (BusinessDesk) - Australia's central bank kept its benchmark interest rate unchanged at 4.75% as expected and said the economy's expansion will be slower than initially estimated this year. The Australian dollar fell against the greenback after the statement.

Governor Glenn Stevens said recovery from floods and cyclones is gradual and the resumption of coal from the flooded mines is taking longer than expected. While the economy will get a "mild boost" from rebuilding efforts, "growth through 2011 is now unlikely to be as strong as earlier forecast," he said in a statement posted on the RBA's website.

Australia avoided the worst effects of the global financial crisis thanks to demand for its raw materials in China and a banking sector less leveraged than its U.S. counterpart. Stevens said today that the global economy is continuing to expand "but the pace of growth slowed in the June quarter."

"Commodity prices have generally softened of late, though they remain at very high levels," Stevens said. "Australia's terms of trade are now at very high levels and national income has been growing strongly, though conditions vary significantly across industries. Investment in the resources sector is picking up strongly in response to high levels of commodity prices and the outlook remains very positive."

Still, households remain cautious and a strong Australian dollar is having "a noticeable dampening effect" while the impact of earlier government spending programmes is abating.

The Australian dollar fell to US$106.60 after the statement from US$106.97 immediately before. The New Zealand dollar rose to 77.61 Australian cents from 77.40 cents.

The Reserve Bank of New Zealand is expected to raise its official cash rate by at least 50 basis points over the next 12 months while little movement is now seen from the RBA, based on the Overnight Index Swap curves. Australia is New Zealand's biggest trading partner.

Stevens said Europe's banking and sovereign debt problems are adding to uncertainty and volatility in global financial markets. Disruptions from Japan's earthquake and high commodity prices have helped slow the pace of global growth in recent months, he said.

At home, employment growth has moderated and is likely to continue at a slower pace in the near term. Skills shortages are confined to the resources and related sectors, Stevens said.

Credit growth remains modest, and has slowed for households. Most asset prices, including housing prices, have also softened over recent months, Stevens said.

Inflation is likely to be close to target over the next 12 months, he said.

(BusinessDesk)

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