RBA keeps rates steady

Australia's central bank left interest rates unchanged yesterday for a third month after slower inflation and diminished financial risks abroad left officials with little need for any shift in policy.

Governor Glenn Stevens kept the overnight cash rate target at 4.5 per cent, the Reserve Bank of Australia said in Sydney, matching all 23 economists' forecasts in a Bloomberg survey.

The statement cited reduced pressure on house prices, less "caution" in financial markets after stress tests on Europe's banks and an outlook for Australian economic growth that's "about trend".

"It signals a very comfortable wait-and-see approach for the Reserve Bank," said Su-Lin Ong, senior economist at RBC Capital Markets.

"At some point cash rates may need to go higher but there's no pressing urgency."

Australia's stocks closed at their highest level in six weeks after the decision.

The pause in rate increases is also a reprieve for Prime Minister Julia Gillard, who is level with Opposition Leader Tony Abbott in some polls ahead of an August 21 federal election.

Both candidates are aiming to win electorates in western Sydney and Queensland that have large numbers of households with mortgages.

The weakest consumer price inflation in three years last quarter increased Stevens's scope to extend the rate pause after six increases since early October. The RBA said in minutes of last month's meeting that Europe's stress tests, as well as local inflation data, would determine whether it would resume the Group of 20's most aggressive round of monetary tightening.

"With growth likely to be close to trend, inflation close to target and the global outlook remaining somewhat uncertain, the board judged this setting of monetary policy to be appropriate," Stevens said in yesterday's statement.

Australia's quarterly inflation report on July 28 showed that core prices, as measured by the central bank's so-called trimmed mean gauge, rose 2.7 per cent in the second quarter from a year earlier. Stevens aims to keep price gains between 2 per cent and 3 per cent.

"Through to mid-2011, underlying inflation is likely to be in the top half of the target zone, while CPI inflation will probably be just above 3 per cent for a few quarters due to the impact" of increased tobacco taxes and utilities, Stevens said yesterday.

- BLOOMBERG