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Low inflation prompts RBA to hold rates

Low inflation numbers have prompted the Reserve Bank to leave interest rates unchanged, with no move expected for the rest of the year, economists said.

The Reserve Bank of Australia (RBA) has left official interest rates on hold at 5.50 per cent.

The move follows the decision to leave rates unchanged in July.

In March, the RBA lifted the cash rate by a quarter of a percentage point to 5.50 per cent, which was the first move since December 2003.

Most economists had forecast interest rates to remain unchanged.

Commonwealth Bank interest rate strategist Sally Auld said recent low inflationary indicators support the RBA's decision to leave interest rates on hold.

"We got the Q2 inflation numbers last week and they were softer than expected and altogether a very good set of numbers, It should give the RBA some confidence that there's not a latent inflation problem in the Australian economy and probably makes them just a little more comfortable with leaving rates unchanged."

ABN AMRO economist Felicity Emmett expected rates to remain on hold for the rest of the year.

"The strength in the labour market was close to having run its course, and growth will continue to slow as the housing sector weighs on activity."

ANZ Bank economist Katie Dean said interest rates were unlikely to change in the near term.

"There's no real reason for monetary policy to be changed at the moment, the economy seems to be humming along relatively nicely, growth is a little more subdued than it has been earlier in the year but the fact that we've got a 30 year low in the unemployment rate and very strong corporate profitability suggests that fundamentals remain very strong and at the same time, prices look to be very much under control."

JP Morgan chief economist Stephen Walters said last week's subdued inflation numbers suggested the RBA had previously been overly anxious about inflation pressures.

"House construction activity is falling in key markets, and house price deflation in the larger cities is having a disinflationary impact on the economy, these factors were probably offsetting lingering anxiety at the RBA about the tightness of the labour market, evidence of capacity constraints in product markets, and the strengthening global economy, which had the potential to further boost Australia's already impressive terms of trade, the central bank was likely to maintain a bias to raise rates.

The absence of widespread wage and price pressures, the expected easing in capacity constraints over the next 12 months and the likely disinflationary impact of the further correction in the housing market meant the RBA would probably leave rates unchanged for the rest of 2005 and over the early months of 2006."