Business

Tue Jul 01 01:25:23 PDT 2008

SYDNEY, July 1 (Reuters) – Australia’s central bank held its benchmark interest rate steady at a 12-year peak of 7.25 percent on Tuesday, a widely expected decision given signs past hikes were working to curb consumer demand and restrain inflation.

In a brief statement following its monthly policy meeting, the Reserve Bank of Australia (RBA) pointed to more signs of weakness in demand, leading the market to price in less risk of further tightening. ****************************************************************

KEY POINTS:

- RBA leaves benchmark cash rate at 7.25 percent as expected, after hiking rates in February and March.

- RBA statement says financial conditions tight, current monetary stance appropriate.

- RBA says credit growth weakened substantially, some signs of easing in tight labour market.

- RBA says inflation to stay high in short term but should ease over time providing demand slows as expected.

- Text of the statement can be found on <RBA01> or [nSYA004429]

- The Reserve Bank’s Web site is at: http://www.rba.gov.au/

COMMENTARY:

JOHN PETERS, SENIOR ECONOMIST, COMMONWEALTH BANK

"It sounds a little less hawkish in that it’s the first time they’ve mentioned an easing labour market. Mind you, that was only one month’s data and we expect a bounce in employment for June. Otherwise, the RBA is cautious on the outlook, pointing to big negatives in the economy, but also big positives like the terms of trade shock. We still think that if rates do move this year it will be up — we put a 55 percent chance on a hike."

RORY ROBERTSON, INTEREST RATE STRATEGIST, MACQUARIE BANK

"It is crystal clear that the RBA is on hold in the forseeable future and the next move is more likely to be down than up. There is growing evidence that the economy is slowing and the central bank pointed to that. It also highlighted for the first time that the labour market is softening, so it is unlikely that there will be a rate hike."

KIERAN DAVIES, CHIEF ECONOMIST, ABN AMRO

"The bank’s statement is very similar to last month, they’re still concerned about inflation because of the pressure from commodity prices, but they seem more confident that a slowdown in activity is underway. As long as that slowdown continues, they should remain on hold."

SALLY AULD, CO-HEAD AUSTRALIAN ECONOMICS, ANZ

"It’s a more dovish statement than we’ve seen in the last couple of months. They’ve started talking about credit concerns resurfacing, and an easing in labour market conditions, but I suspect they don’t want to say too much until they get the Q2 inflation numbers.

We’re still forecasting rate hikes, and we’re not going to change that until we see the inflation numbers."

MARKET REACTION:

- The Australian dollar <AUD=> eased a quarter of a U.S. cent to 95.56 U.S. cents in initial reaction to the statement. Bill futures <0#YBA:> firmed as investors took the statement as lessening the risk of yet another rate hike.

BACKGROUND:

- The RBA has raised interest rates four times since last August as it battles to contain an alarming acceleration in inflation, with everything from food to fuel, health and education rising in price.

- Core inflation surged by more than expected last quarter to reach a 17-year high of 4.2 percent, well above the central bank’s 2 to 3 percent target band.

- The central bank has warned that it would act again should domestic demand revive or signs grew that high inflation was being built into wage and price expectations.

- The RBA recently noted that domestic demand was cooling and it was prepared to give past tightening time to work on the economy.

- Still, tax cuts and a boom in the country’s terms of trade mean the central bank cannot relax its guard on inflation and any easing in policy is a distant prospect.

(Reporting by Sydney newsroom; Editing by James Thornhill)

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