THE Reserve Bank has left its official interest rate unchanged at a record low for the third straight month, dashing hopes of further rate cuts for now.
After a meeting of the central bank's board, the RBA left its cash rate at 3 per cent, a 49-year low - the same rate that has applied since its last cut in April, which was made in response to a slowdown in the economy.
''It looks as if the RBA is on hold for the longer term,'' said Matt Robinson of Moody's Economy.com. ''There is no real need or desire for further easing.''
The RBA has slashed 425 basis points - from 7.25 per cent to 3 per cent - from interest rates since September in an effort to shield Australia from the worst effects of the global recession.
''The global economy is stabilising, after a sharp contraction in demand during the December and March quarters,'' said RBA Governor Glenn Stevens, in an accompanying statement.
''Downside risks to the outlook have diminished, with conditions in global financial markets improving this year and action to strengthen balance sheets of key financial institutions under way,'' he said. ''Growth in China has strengthened considerably, which is having an impact on other economies in the region, including Australia.''
The Australian dollar bounced after initially easing after the RBA statement. It gained in recent trade to 79.86 US cents from 79.68 US cents, just prior to the release. Stocks were little changed.
In a note of qualified optimism, Mr Stevens also detailed areas where the local economy is improving.
''A pick-up in housing credit demand suggests stronger dwelling activity is likely later in the year,'' he said.
''House prices are tending to rise. Business borrowing, on the other hand, has been declining, as companies postpone investment plans and seek to reduce leverage in an environment of tighter lending standards. Large firms have had good access to equity capital, which is assisting in strengthening their financial structures.''
There are other reasons for optimism, the RBA said, although corporate investment remains an area of weakness.
''Monetary policy has been eased significantly. Market and mortgage rates are at very low levels by historical standards, despite recent small increases. Business loan rates are below average,'' Mr Stevens said. ''The effects of these changes will still be coming through for some time yet. Fiscal measures are also providing considerable support for demand.''
Unlike the US, where rates remain close to zero, the RBA has further room to lower rates if demand weakens. One reason is that inflation remains subdued and may ease further.
''Weaker demand for labour is leading to lower growth in labour costs,'' the RBA said. ''These conditions should see inflation continue to abate over the period ahead.''
Some analysts, though, say the RBA won't need to resort to further cuts.
''They still see inflation falling and providing some scope for more easing if needed, but the sense we get is that they're becoming slightly more positive on recovery both in Australia and globally, and our view is that they won't act on that easing bias,'' said Paul Brennan, co-head of market economics at Citi. (Click here for more comment.)
''We think rates are on hold until towards the end of the year, then we'll see the process of gradually increasing rates from the end of this year, early next year."
Investors, in fact, predict official interest rates will reverse course within a year, with markets pricing in a half-percentage point increase to 3.5 per cent, by July 2010 prior to the RBA announcement.
When it announced its ''no-change'' decision on rates today, the RBA board was probably encouraged by tentative signs of a pick-up in domestic demand in recent weeks.
Retail sales grew more than expected in May, revealing shoppers' willingness to spend a chunk of the Federal Government's latest round of stimulus payments. The spending boost has in turn helped keep the Australian economy expanding - unlike almost every other developed nation.
Also, an index of the performance of the services sector, the largest part of the Australian economy, expanded in May for the first time in 15 months, according to a report out last week.
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