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RBA on pause for now but more rate cuts to come

03 Mar 2009 3:09 PM

SYDNEY, March 3 AAP - The Reserve Bank of Australia (RBA) hit the pause button on its easing cycle on Tuesday, saying it believe interest rate settings were appropriate for the current economic climate.

But economists think the RBA could cut again in coming months, particularly if the resilience seen recently in the economy starts to falter.

The RBA left the cash rate at 3.25 per cent, a 45-year low, with its board citing major initiatives in domestic monetary and fiscal policies in the past few months.

"Market and mortgage rates are at very low levels by historical standards and business loan rates are below recent averages, reducing debt-servicing burdens considerably," governor Glenn Stevens said in a statement.

"Together with the substantial fiscal initiatives, the cumulative decline in interest rates will provide significant support to domestic demand over the period ahead."

Mr Stevens said the decision not to move the cash rate for the first time in six monthly meetings was made in the knowledge that demand in Australia had not weakened to the depths of many other countries.

Since September the RBA has cut the cash rate by 400 basis points in a bid to cushion the economy from the global economic slowdown.

"On the basis of currently available information, the Australian economy has not experienced the sort of large contraction seen elsewhere," Mr Stevens said.

"The Australian financial system remains strong and the monetary policy transmission process is working to deliver large reductions in interest rates to end borrowers."

Commonwealth Bank senior economist John Peters said the RBA's decision was a close call, considering market economists were split on whether the central bank would ease again on Tuesday.

"It was a line ball but we think the big picture view that they have not finished yet," Mr Peters said.

"The economy here is showing a lot more resilience than certainly the North American, European and Japanese economies."

Mr Peters said recent strong data including capital spending, retail sales and construction work done displayed the economy was not tanking like fellow industrial economies.

"It looks like the economy so far has dodged the recessionary bullet," Mr Peters said.

The central bank has paused to take in the impact of the stimuli in the local economy before moving again, Mr Peters said.

"There is 400 basis points in easing in the cycle, which is probably not impacting to a substantial degree yet," he said.

"We see another half a per cent to three-quarters to come in the next few months, which would take the cash rate to 2.50 to 2.75 per cent."