Rate held as Euro pressure eases

Australia's central bank kept its benchmark interest rate unchanged as growth prospects in the US improve and China's outlook stays "quite robust," while Europe remains a risk.

Governor Glenn Stevens and his board left the overnight cash-rate target at 4.25 per cent, the Reserve Bank of Australia said yesterday, using a phrase he employed last month by calling policy "appropriate for the moment." He repeated there's scope to cut rates if demand weakens.

Stevens' second straight pause after two reductions late last year reflects confidence US companies will keep hiring, Europe's recession will remain mild and domestic employment will be supported by A$456 billion ($594 billion) of resource projects.

He maintained a view that inflation will stay within the central bank's 2 per cent to 3 per cent target range, even as the consumer-price index may weaken in the next quarter or two.

Recent information indicates "the world economy will grow at a below-trend pace this year, but does not suggest that a deep downturn is occurring," Stevens said. "Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy."

The RBA's decision to maintain the highest benchmark borrowing costs among major developed economies was forecast by all 25 economists surveyed by Bloomberg News.

The Australian dollar, the world's fifth-most traded currency, has strengthened about 4 per cent this year as investors bet the nation's economy will accelerate.

"The acute financial pressures on banks in Europe have been alleviated considerably by the actions of policy makers, though there is more to do to put European banks and sovereigns on to a sound footing for the longer term and Europe will remain a potential source of shocks for some time yet," Stevens said.

China is Australia's biggest trading partner and the RBA has said it expects Chinese demand for commodities to spur the domestic economy.

Manufacturing in China expanded for a third straight month, a purchasing managers index released last week showed. Still, China yesterday pared the nation's economic growth target to 7.5 per cent from an 8 per cent goal in place since 2005.

"Growth in China has moderated as was intended but on most indicators remains quite robust," Stevens said.

In the US, recent reports have highlighted an expansion that's broadening, with data yesterday showing service industries unexpectedly expanded last month at the fastest pace in a year. Initial claims for jobless benefits fell in late February to the lowest level since March 2008, a sign the labour market in the world's biggest economy is healing.

"Several European countries will record very weak outcomes, but the US economy is continuing a moderate expansion," Stevens said.

Australia has grown more dependent on resources as employment in manufacturing dropped by about 30 per cent since 2007, while mining and government rose by more than 50 per cent, HSBC Holdings estimates.

Car exports plunged to the lowest since 1998 last year, leading to job cuts at General Motors and Toyota's local units.

Sydney-based David Jones, the nation's second-largest department store chain, said on February 23 that second-quarter sales fell 3.1 per cent as spending stalled and the strong currency made it cheaper for shoppers to buy from overseas websites.

The RBA "expects inflation to be in the 2 per cent to 3 per cent range," Stevens said. "Credit growth remains modest."

Housing prices have shown signs of stabilising recently, after having declined for most of 2011, but "generally the housing market remains soft."

After last month's rate pause, the country's four biggest lenders - Commonwealth Bank of Australia, National Australia Bank, Westpac Banking and Australia & New Zealand Banking Group - raised mortgage rates, citing higher wholesale funding costs.

- Bloomberg