Aust businesses urge caution on interest rates

Economist Shane Garrett says mining investment is slowing more quickly than expected.

Business groups are urging the Reserve Bank of Australia to exercise caution before considering raising interest rates, given improving signs in the economy are not yet widespread.

The central bank left the cash rate at an all-time low of 2.5 per cent at Tuesday's monthly board meeting, as widely expected by economists.

The RBA last cut the cash rate in August 2013.

Bookies expect at least another month of stable rates in May so the central bank board can see what Treasurer Joe Hockey serves up in his first budget.

RBA governor Glenn Stevens believes interest rate policy is appropriately configured to foster sustainable growth in demand and inflation outcomes that are consistent with its two to three per cent inflation target.

"On present indications, the most prudent course is likely to be a period of stability in interest rates,'' Stevens said in his post-meeting statement.

Housing Industry Association senior economist Shane Garrett says it is extremely important that low interest rates are maintained, faced with an economy that is growing below trend and with the unemployment rate at a decade high of six per cent.

"Mining investment is slowing more quickly than expected, and the RBA has to offer other sectors of the economy the chance to fill the growth gap,'' Garrett said in a statement.

He says while residential building has responded well to low rates, it is vital they remain so to insure the housing recovery reaches its full potential.

New data released on Tuesday shows house prices posted their biggest monthly gain in 18 years, jumping 2.3 per cent in March.

The RP Data Rismark home value index showed capital city prices were 10.6 per cent higher over the year, led by strong gains in Sydney and Melbourne.

Stevens acknowledged that dwelling prices had increased significantly over the past year but credit growth was only slowly picking up.

Retailers said while there were signs of a spending revival, the small business sector was still struggling.

"We are still seeing sectors of retail doing it very tough,'' Australian Retailers Association executive director Russell Zimmerman said.

He urged the central bank to exercise the same caution in raising rates in the future as it did lowering them.

Meanwhile, manufacturing continues to struggle, highlighting that large parts of the economy are failing to gain traction, according to Australian Industry Group chief executive Innes Willox.

The group's performance of manufacturing index fell 0.7 points to 47.9 in March, remaining below the crucial 50-mark that indicates activity in the sector is in contraction.

"Subdued local demand and the newly resurgent dollar are weighing heavily against the efforts of manufacturers to rebuild their sales base in Australia and internationally,'' Willox said.

-AAP