Reserve Bank keeps interest rates steady at 7.25pc

AUSTRALIA'S central bank has today decided to keep interest rates on hold at 7.25 per cent, which will keep standard variable mortgage rates at...

RBA keeps interest rates steady at 7.25pc

AUSTRALIA'S central bank has today decided to keep interest rates on hold at 7.25 per cent, which will keep standard variable mortgage rates at around 9.5 per cent, for now.

After eight official rate rises in three years, the central bank has left the official cash rate unchanged for a third straight month as economic growth slows.

The central bank sets interest rates to keep inflation between 2 and 3 per cent, but inflation stood at 4.2 per cent in the March quarter.

But the central bank is hoping that a slowing economy can cool inflation, rather than more interest rate rises.

Rates high enough, for now

 The RBA said today several official rate rises, and additional rises in interest rates charged by lenders, has boosted credit costs since the middle of last year, which has slowed borrowings.

"Indicators of household spending have recorded subdued outcomes over recent months, and credit expansion to both households and businesses has weakened significantly.

"The board’s judgement is that the current stance of monetary policy remains appropriate for the time being," the .central bank said. 

However, any sign that inflation keeps on rising could push the RBA to raise rates again down the track.

"The board will continue to evaluate prospects for economic activity and inflation in the light of new information," the RBA said.

Hoping for inflation cure

A private sector survey, released yesterday, showed that inflation is growing at its fastest pace in at least five-and-a-half years. 

A sharply higher oil price has helped to boost inflation above the RBA's tolerance level and the RBA fears wage demands could accelerate inflation.

But the RBA is hopeful inflation will fall as the Australain economy slows.

"In the short term, inflation is likely to remain relatively high, but it should decline over time provided demand evolves as expected," the RBA said.

"Should demand not slow as expected, or should expectations of high ongoing inflation begin to affect wage and price setting, that outlook would need to be reviewed."

The next official inflation figures, due on July 23, could force the RBA to push through another rate hike, said ANZ co-head of Australian economics and interest rate research Sally Auld.

"Clearly the jury is still out at the RBA, but if rates are to move in the next six months it will be up,'' she said.

ANZ last week forecast two interest rate rises by the end of the the year, which would take the cash rate to 7.75 per cent.

But chief economist at funds manager Ausbil Dexia, John Honan, believes the official cash rate had peaked.

"The domestic issues have been moving the way the Reserve Bank would want them to move, that is slowing in the interest rate sensitive areas,'' Mr Honan said.

"It will be very pronounced by the end of 2008 and that will give the bank room to move.''

Relief for homeowners

Home owners would be relieved by today's decision with standard variable rate already sitting at a 12-year high after seven official rate rises in two years - and more rate hikes on top of that by the big banks.

A survey by NEWS.com.au and polling firm Coredata published last week found more rate rises could force some people to the wall. If there was a further 1 per cent rise in interest rates, almost half or 47 per cent of property investors said they would be forced to sell their homes.

Of homeowners, one in three said they would sell if the rate rose another 1 per cent.

The survey of NEWS.com.au readers revealed more than one in two Australians, or 67 per cent, believe their financial situation is worse now than 12 months ago.

Real Estate Institute of Australia (REIA) president Noel Dyett said today's rate decision would be met with much relief given that housing affordability was at an all-time low and many households are under mortgage stress.

"While we understand the need to get inflation under control, the REIA urges the Reserve Bank to act with caution in the months ahead,'' Mr Dyett said in a statement.