Tuesday, June 2, 2009

RBA keeps rates on hold

At its meeting today, the Reserve Bank of Australia has decided to keep rates on hold, continuing with a cash rate at 3.00%. RBA governor, Glenn Stevens, said Australia's economy was benefiting from the significant cuts to interest rates made so far, combined with the Federal Government's fiscal stimulus.

However, in his statement, RBA governor, Glenn Stevens made specific reference to the decline in business lending "as companies postpone investment plans and seek to reduce leverage, in an environment of tighter lending standards."

Because of these concerns, the consensus among economists is that further rates will still be required later this year as unemployment falls. In confirmation of these views Mr Stevens said,

"Monetary policy has been eased significantly...Business loan rates are below average. Much of the effect of this is yet to be observed...the prospect of inflation declining over the medium term suggests that scope remains for some further easing of monetary policy, if needed.

Our view: The RBA should cut rates sooner rather than later to help restore business investment that is obviously in retreat. The effect of this will be seen in the unemployment figures over coming months. A lower cash rate would also take pressure off an overvalued currency that has the potential to diminish exports and further damage company profits... but that's another story.

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