Reserve Bank's official interest rate kept on hold at 4.5 per cent

HOMEOWNERS spared higher mortgage payments after the Reserve Bank holds fire on rates.

The Reserve Bank board's decision is a balancing act between a robust local economy and a problematic European and US economy / File

BORROWERS receive a reprieve from a further squeeze on their budgets for at least another month after the Reserve Bank left the cash interest rate unchanged.

The central bank left the cash rate at 4.5 per cent for a second straight month today, as expected.

"The current setting of monetary policy is resulting in interest rates to borrowers around their average levels of the past decade," Reserve Bank governor Glenn Stevens said in a statement accompanying the decision.

"Pending further information about international and local conditions for demand and prices, the Reserve Bank board views this setting of monetary policy as appropriate."

Treasurer Wayne Swan said the Reserve Bank's decision was good news for families and businesses.

He added that family budgets had already been stretched thin by earlier interest rate hikes.

Citigroup managing director of investment and research analysis, Paul Brennan, said the Reserve Bank board noted the risks from offshore but also acknowledged the strength in the local economy.

"They continue to highlight the high commodity prices with the terms of trade," Mr Brennan said.

"They have not changed their forecast for growth, they have slightly nudged up their inflation forecast but they don't see that as a trigger to raise interest rates."

Mr Brennan said the next move by the Reserve Bank was unlikely to be a cut, as priced by debt futures markets, particularly given the it was a "positive statement".

"Those looking for a downgrading in the Reserve Bank's rhetoric would be disappointed with the statement," he said.

"The talk of cutting interest rates is off the mark and this statement certainly would not give comfort to that view (that) the next move is down."

Foreign exchange traders reacted positively to the Reserve Bank's statement, with the dollar appreciating from $US0.8372 just before the decision at 2.30pm AEST to $US0.8411 half an hour later.

Reserve Bank worried about inflation

JP Morgan economist Helen Kevans said the statement showed the Reserve Bank was worried about inflation in the near term.

Ms Kevans said she now expected the Reserve Bank to lift the cash rate as early as August and again in the fourth quarter of 2010, taking the cash rate to 5 per cent.

"The RBA is definitely flagging that inflation will increase significantly in the near term," she said.

"Conditions in the labour market are pretty tight and the RBA is seeing pressures there.
"So that's definitely something the RBA is watching very closely."

The jobless rate dropped to 5.2 per cent in May, close to the level economists call full employment.

In his statement, Mr Stevens noted that wages were starting to increase, while underlying inflation looks likely to be in the upper end of the Reserve Bank's 2 to 3 per cent target band over the next year.

"The rate of (the consumer price index) increase is likely to be a little above three per cent in the near term, due to the effects of increases in tobacco taxes announced earlier in the year and significant increases in prices for utilities," he said.

Ms Kevans said the central bank was also exhibiting more caution on the global economic front, with Mr Stevens' statement noting emerging tightness in finding markets.

"The statement was exhibiting the RBA's caution on the global side," Ms Kevans said.

"But on the domestic front the RBA was more positive and the terms of trade, growth being around trend, business investment increasing.

"They're all things that weren't raised in the last statement."