Interest rates to stay on hold - RBA report

HOMEOWNERS can breath easy with the RBA indicating that rates may be on hold for some time.

RBA

INTEREST rates are right where they should be and there is plenty of time before another move might be needed.

This is the message from the minutes of the monetary policy meeting of the board of the Reserve Bank of Australia (RBA) held on February 1.

The meeting ended with a decision to leave the benchmark cash rate at 4.75 per cent, where it had been since an increase from 4.5 per cent in November.

"Given the medium-term outlook for the economy, and the limited amount of spare capacity that existed, members judged that this slightly restrictive policy stance remained appropriate,'' the RBA said in the minutes.

And there is no move on the near horizon, thanks to nervous consumers more concerned with reducing debt and less interested in spending than they were before the financial crisis, along with recent inflation figures that came in lower than most - including the RBA - had expected.

"The continuation of subdued growth in consumer spending and the lower-than expected inflation outcomes provided additional time for the Board to assess at future meetings the evolving risks to both output and inflation,'' the RBA said.

The outlook underpinning the RBA's decision is a familiar one, despite the blow to the economy's near-term prospects from widespread flooding and the expected boost from the subsequent rebuilding effort.

"There had been significant damage to crops and physical capital in particular regions, but the information available to date suggests that the medium-term prospects for the economy were largely as they had been prior to the floods.''

Whether consumer spending will remain subdued was subject to some uncertainty, the RBA said.

So was the timing of the expected boom in capital spending.

The background of strong growth in commodity prices and a consequent boost to national incomes and spending still was there.

And so was the expectation that gross domestic product would expand by 4.25 per cent through this year and grow at above the long-run trend rate (about 3.3 per cent) in the years following.

As a result, the outlook for a gradual pick-up in inflation to around three per cent in underlying terms, from around 2.25 per cent by the RBA's last estimate, also remains intact.

That rising inflation/above-average growth outlook is a recipe for future interest rate rises.

But for the time being - presumably a few months at least - the RBA seems happy to sit and wait to see how things pan out.