Relief for home owners as Reserve Bank leaves its official cash rate at 4.5 per cent

THE Reserve Bank has left its official interest rate at 4.5 per cent on hold for a third straight month.

The Reserve Bank has left the cash rate unchanged following its monthly board meeting today, providing relief for both borrowers and Federal Labor.

As widely expected, the central bank left the cash rate at 4.5 per cent for a third straight month.

The decision was influenced by key elements of last week's consumer price index proving benign.

Reserve Bank governor Glenn Stevens said current interest rates were around the average level of the past decade.

"With (economic) growth likely to be close to trend, inflation close to target and the global outlook remaining somewhat uncertain, the board judged this setting of monetary policy to be appropriate," he said in a statement.

The board next meets on September 7, more than two weeks after the Federal Election.

The Reserve Bank left its interest rate unchanged at 4.5 per cent for the third straight month on Tuesday, but economists say the central bank is still on track to take the rate to five per cent by year end.

Expectations of a rate rise in August were all but erased last week when the June quarter consumer price index (CPI) headline rate of inflation came in at a lower than expected annual pace of 3.1 per cent.

The Reserve Bank's underlying measure was also lower than expected at 2.7 per cent.

ICAP economist Adam Carr said the Reserve Bank was unlikely to raise the cash rate until inflation was above the Bank's target band of two to three per cent.

"After the CPI, it was pretty clear that they weren't going to tighten today," Mr Carr said.

"My expectation is they will probably stay on hold till they get the next inflation print in mid-September.

"By then I expect inflation to have bounced back and for them to hike in November.''

Inflation will rise by the end of the year

In his statement accompanying the decision, Reserve Bank governor Glenn Stevens said while the current cash rate was appropriate for the nation's economic conditions, he expected inflation to be higher by year end.

"Through to mid 2011, underlying inflation is likely to be in the top half of the target zone, while CPI inflation will probably be just above 3 per cent for a few quarters due to the impact of the tax changes and increases in utilities prices.''

The central bank had taken the cash rate from three per cent to its current 4.5 per cent in six incremental moves between October last year and May.

Mr Stevens also said in his statement that global economic expansion had been uneven over the year to june 2010, with growth likely to be ``somewhat lacklustre in the second half of 2010.''

Mr Carr said the Reserve Bank's caution was coming from mis-information about the state of the global recovery.

"It's going to take time for that to be disproved, but by the end of the year the strength of the global economy will be proved and inflation will be on the rise and the RBA will lift rates," he said.

RBC Capital markets senior economist Su-Lin Ong said the statement showed there was no urgency to tighten monetary policy.

"Clearly the RBA is in a very enviable position," she said.

"Growth domestically is expected to be around trend, inflation is within their target range, with rates and borrowing costs around decade averages," she said.

"There's no real urgency to move rates at all given what the current growth and inflation outlook is suggesting and that's particularly the case given the uncertainty globally."

She said the Reserve Bank clearly made the point that financial markets had improved a little but there was still a lot of uncertainty over the general growth outlook.

"In these circumstances the RBA is in a good position. It's just going to sit on its hands some more.

"There's nothing in the domestic data that's suggesting there's any need or any urgency to exercise that tightening bias."

She said it appeared the central bank had not changed its growth or inflation forecasts significantly.

The statement also gave no indication as to when the Reserve Bank would move to tighten monetary policy, she said.

The dollar rose about 0.1 of a US cent after the Reserve Bank's monetary policy decision was released.