Central bank holds off on interest rates

SYDNEY - Economic growth is slowing and inflation pressures have eased, the Reserve Bank of Australia says, signalling it is unlikely to increase interest rates again this year.

It said yesterday in its quarterly statement on monetary policy that the risks of a jump in inflation were "not as strong as they had been earlier in the year". The bank did not repeat comments from the two previous quarterly statements which said it would be surprised if interest rates did not need to increase again in the present expansion.

Yesterday's statement may reinforce expectations by economists that the central bank will keep interest rates unchanged until at least March next year. Last week, RBA Governor Ian MacFarlane and his board kept the overnight cash rate target unchanged for a fifth month at 5.5 per cent amid signs of a slowdown in the economy.

"Recent economic data have appeared consistent with an economy growing at a reasonable though not excessive pace," it said yesterday.

"While the board's judgment remains that underlying inflation is likely to increase over the next year or so, the extent of the increase should be quite limited unless there is a significant re-acceleration in domestic demand. The latter seems unlikely."

The key gauge of inflation, the consumer price index, rose a less-than-expected 2.5 per cent in the second quarter from a year earlier. Macfarlane aims to keep annual inflation between 2 per cent and 3 per cent.

The second-quarter figures "indicated that consumer price inflation had remained stable in headline and underlying terms, while upstream price pressures appeared to have eased", the RBA said.

It forecast underlying inflation may peak at 3 per cent by the second half of next year.

"The risks to the forecasts are judged to be evenly balanced, whereas earlier in the year they had appeared to be weighted to the upside," it said.

The RBA has raised its benchmark rate once this year, by a quarter percentage point in March, to a four-year-high 5.5 per cent to curb inflation. By contrast, the US Federal Reserve has raised its key rate nine times since June 2004 to 3.25 per cent.

The A$800 billion ($1157 billion) economy, in its 14th straight year of expansion, grew 1.9 per cent in the first quarter from a year earlier as home building and business investment declined. That compares with 4.1 per cent in the quarter a year-earlier and 3.6 per cent in the US economy in the same period.

"Domestic demand has slowed from its previous rapid pace and is now on a more sustainable trend," the bank said. Consumers are "borrowing less and increasing their spending less quickly than they were a year or two ago".

A slowdown in borrowing "has been associated with a cooling in the housing market".

Business investment was likely to increase, "with the prospects for engineering construction activity looking particularly strong".

The RBA said the Government's income tax cuts, that began on July 1, and rising employment would help underpin consumer spending, ensuring the economy did not falter.

- BLOOMBERG