The Reserve Bank has left its key interest rate on hold as it awaits clearer signals about the strength of the global economy.
As widely expected by economists, the central bank left its cash rate at 3.5 per cent. All but one of 27 economists surveyed by Bloomberg expected the RBA to leave rates unchanged at today’s monthly meeting.
‘‘The RBA seems comfortable with the current accommodative monetary policy settings given the downbeat and uncertain global environment,’’ said Moody’s Economy.com analyst Katrina Ell.
‘‘Unless the volatile situation in Europe deteriorates further, the most prudent strategy for coming months is to hold tight and gauge the impact of earlier monetary stimulus on the domestic economy,’’ she said.
The RBA cut interest rates four times between November and June as the Australian economy slowed and concerns about the world economy grew. The central bank remains wary about Europe's ongoing debt issues, a point repeated today by RBA governor Glenn Stevens.
"Financial markets have responded positively to signs of progress, but Europe will remain a potential source of adverse shocks for some time," said Mr Stevens said in the accompanying statement.
Since the RBA began cutting rates again late last year, banks have passed about a full percentage point in cuts to borrowers. For households on a typical $300,000 mortgage over 25 years, that reduction amounts to savings of about $196 in monthly repayments.
The Australian dollar initially rose on the RBA decision, climbing back above the $US1.06 mark briefly before giving up its gains to trade recently at $US1.0585. Stocks, meanwhile, held on to their earlier advances.
At $US1.06, that's the highest level since March 20 against the greenback.
The dollar has rallied from 99 US cents since the last interest rate cut by the RBA on June 5, making it the best performing major currency in the world, as tracked by Bloomberg.
Some economists, such as former RBA board member Warwick McKibbin, have called on the central bank to intervene by selling Australian dollars to drive it lower on international markets. In today's statement, the RBA acknowledged that the currency had been rising even as commodity prices declined.
"The exchange rate...has remained high, despite the observed decline in the terms of trade and the weaker global outlook," Governor Stevens said in the statement.
Paul Bloxham, an economist with HSBC and a former central bank official, predicts one more official interest rate cut this year but not until the December quarter. Such a move would most likely be in response to slowing global, rather than domestic, economic growth, he said.
Mr Bloxham, though, doesn't expect the RBA to act - outside rate moves - to drive the dollar lower.
‘‘I doubt we’re going to see action on that front in the form of intervention into the Aussie dollar market,’’ he said. ‘‘They’re more likely to take that into account in the way they set the cash rate than to intervene directly.’’
One benefit of the strong currency is that import prices are lower, helping to keep a lid on consumer prices - and giving the RBA more room for further cuts, Mr Bloxham said.
‘‘If the Aussie dollar stays high and puts further downward pressure on inflation, it leaves them with even more room to cut the cash rate."
While steady today, the RBA's cash rate remains just 50 basis points - or two typical rate moves - above its record low during the global financial crisis. Although low by Australian standards, the cash rate is much higher than most advanced economies.
Equivalent official lending rates include just 0.1 per cent in Japan, 0.25 per cent in the US, 0.5 per cent in the UK, 0.75 per cent in the eurozone and 2.5 per cent in New Zealand.
"We still have a 25 basis-points (rate) cut pencilled in for the fourth quarter but if Europe continues to muddle through further cuts are unlikely," said Moody's Ms Ell.
Australia's economy weathered the global financial crisis better than virtually all developed nations. Recent upbeat data includes the 1 per cent increase in retail sales in June, more than economists had expected.
Nationwide, house prices are also rising again, with a 0.6 per cent increase in July adding to the 1 per cent rise in June, according to RP Data-Rismark. Auction clearance rates hit a two-year high in Sydney last weekend, rising to 68 per cent, while they remained flat in Melbourne.
The next key economic data comes out on Thursday with the release of official labour force figures for July. Economists are expecting employers added 10,000 jobs for the month, not enough to prevent the jobless rate creeping up to 5.3 per cent. Such a level would be the most in 10 months.
While on the increase, Australia's jobless rate compares to about 8 per cent in the US - less than 100 days before the presidential elections - and remains about half the level of the eurozone nations.
Just prior to today's rates announcement, investors viewed the prospect of a rate cut at about a one-in-ten chance. Looking ahead, they were betting the RBA would cut another 50 basis points - equivalent to two typical rate moves - over the next 12 months.
The expectations of another two rate cuts over the coming year were the lowest since mid-March, according to Credit Suisse data.
According to interest rate futures, the next rate cut will come in October.