Reserve Bank 'likely to hold interest rates' in short-term

RBA tipped to hold off on raising interest rates today as economy emerges from first-quarter slump caused by natural disasters.

Reserve Bank

THE Australian economy is emerging strongly from the first-quarter slump caused by the run of natural disasters locally and in key trading partners.

Reserve Bank governor Glenn Stevens is likely to deliver a warning after today's board meeting that the interest rate freeze is "appropriate for the time being" but should not be assumed to be long-term, reported The Australian.

Since the board's April meeting, the strengthening of the economy has been shown in a sharp fall in unemployment, a strong recovery in business trading conditions and a rebound in business borrowing.

The monthly data pulse index compiled by Westpac, which tracks whether the key official and private sector economic releases have risen or fallen in the latest month, is at its highest point since the euphoria of early recovery as the economy emerged from the global financial crisis without falling into recession.

The flow of data is approaching positive levels reached in late 2007, when the economy was booming.

"The index is saying that the Australian economy has now weathered the natural disasters, both here and Japan, very well," Westpac chief currency strategist Robert Rennie said.

The global picture remains mixed with the advanced economies losing momentum, while emerging nations recover from a soft patch at the start of the year. "The strong momentum in late December and early January in the developed world is softening," Mr Rennie said.

"In the US, high gasoline prices are having an impact on both consumer sentiment and business confidence.

"Japan is only releasing partial data, but its Performance of Manufacturing Index and other indicators of business activity are deeply concerning, at levels not seen since the worst of the global financial crisis. Europe has also continued to soften, with the flow of data at its weakest level since August last year."

Europe is suffering the effects of a rising currency and the early influence of monetary tightening.

By contrast, China is leading a strengthening in the emerging world. Its economy softened in the early part of the year as its central bank tightened monetary policy and with activity hit by an early lunar new year.

However, over the past six weeks or so, orders have strengthened and growth has been strong.

The Reserve Bank devotes part of each board meeting to reviewing global financial conditions.

Read more about the Reserve Bank's assessment of the economy at The Australian