 Rate cuts possible
While the Reserve Bank of Australia (RBA) left rates unchanged today, they say there is scope for further cuts if necessary.
The central bank left rates at 3 per cent, a 49-year low. This is the third consecutive month rates have been left on hold.
However, the RBA noted in a statement that further cuts could be necessary.
"The Board's current view is that the outlook for inflation allows some scope for further easing of monetary policy, if needed," it said in its statement.
"In assessing how it might use that scope, the Board will continue to monitor how economic and financial conditions unfold and how they impinge on prospects for a sustainable recovery in economic activity."
All 19 economists surveyed by Reuters late last week predictedthat the official cash rate would remain unchanged.
Macquarie Group interest rate strategist Rory Robertson was predicting no changes to the rates, saying housing, retail and car sales have been rising over recent months. He believes there needs to be further increases in unemployment before the RBA will consider cutting rates again.
The RBA again emphasised the historically low level that both official and home lending rates are currently at, and government stimulus efforts that have sparked recent signs of life in retail sales and home lending (at least for first home buyers), and relative stability in the unemployment rate.
However, Westpac's chief economist Bill Evans says believes the stimulus will wear off, and the Reserve Bank will need to cut rates again.
"I expect that the unemployment rate will be up around 7.5 per cent by the end of this year... I think interest rates will come down, but that will require some fairly big negatives in the employment environment, which I expect to see in the next 3 to 6 months."
One area of concern that the Reserve Bank does have is the European economy, which still seems to be deteriorating rapidly. While Australian housing, retail and car sales are encouraging, other developed nations are not faring so well.
Currency markets initially welcomed the decision, with a small bounce in the Australian dollar from 79.67 US cents just before the announcement to 79.90 US cents at 3:15pm (AEST). But by 5:00pm the Australian dollar had slipped back to 79.61 US cents.
Analysts will get a better grasp on the Reserve Bank's thinking when it releases the minutes of this meeting in two weeks' time.
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