Oz Reserve Bank holds rate at 3.5 per cent

The Reserve Bank of Australia (RBA) has dashed mortgage holders' hopes of a third consecutive interest rate cut by keeping the cash rate on hold at 3.5 per cent.

The decision by the RBA board yesterday comes after the central bank cut the cash rate by half a percentage point in May and a quarter of a percentage point in June.

In a statement accompanying the decision, RBA governor Glenn Stevens said the Australian economy grew faster than expected in early 2012, although there were signs of weakening in Europe and China.

He said the RBA expected inflation to remain within the RBA's target band of 2 to 3 per cent.

"At today's meeting the board judged that with inflation expected to be consistent with the target and growth close to trend, but with a more subdued international outlook than was the case a few months ago, the stance of monetary policy remained appropriate."

But he said growth in domestic costs would need to slow over the longer term to maintain inflation within that band.

Stevens said interest rates charged by banks had fallen in recent months as a result of the RBA's recent rate cuts.

"Interest rates for borrowers have declined, to be a little below their medium-term averages," he said.

"Business credit has increased more strongly in recent months, though credit growth remains modest overall."

- AAP