RBA holds interest rates at record low of two percent

The Reserve Bank has kept interest rates on hold, despite the global market volatility and weak domestic investment figures.

The RBA met this afternoon at their monthly board meeting and voted to keep the cash rate at the record low of two percent.

Australian National University's Timo Henckel said earlier today wild swings on global stock markets have made investors edgy, the economic news coming out of China is not favourable and figures last week showing domestic private investment has plummeted.

"On the other hand, US growth surged to 3.7 percent annually and fears of a debt crisis in the eurozone have abated," Dr Henckel said.

A statement from the board released with today’s announcement acknowledged Australia’s terms of trade were falling.

"In Australia, most of the available information suggests that moderate expansion in the economy continues," the statement read.

"While growth has been somewhat below longer-term averages for some time, it has been accompanied with somewhat stronger growth of employment and a steady rate of unemployment over the past year."

Full statement from the RBA on Tuesday 1 September:

At its meeting today, the Board decided to leave the cash rate unchanged at 2.0 percent.

The global economy is expanding at a moderate pace, with some further softening in conditions in China and east Asia of late, but stronger US growth.

Key commodity prices are much lower than a year ago, in part reflecting increased supply, including from Australia. Australia's terms of trade are falling.

The Federal Reserve is expected to start increasing its policy rate over the period ahead, but some other major central banks are continuing to ease policy.

Equity markets have been considerably more volatile of late, associated with developments in China, though other financial markets have been relatively stable.

Long-term borrowing rates for most sovereigns and creditworthy private borrowers remain remarkably low. Overall, global financial conditions remain very accommodative.

In Australia, most of the available information suggests that moderate expansion in the economy continues. While growth has been somewhat below longer-term averages for some time, it has been accompanied with somewhat stronger growth of employment and a steady rate of unemployment over the past year.

Overall, the economy is likely to be operating with a degree of spare capacity for some time yet, with domestic inflationary pressures contained. Inflation is thus forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.

In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending. Credit is recording moderate growth overall, with growth in lending to the housing market broadly steady over recent months.

Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market.

In other asset markets, prices for commercial property have been supported by lower long-term interest rates, while equity prices have moved lower and been more volatile recently, in parallel with developments in global markets.

The Australian dollar is adjusting to the significant declines in key commodity prices.

The Board today judged that leaving the cash rate unchanged was appropriate at this meeting.

Further information on economic and financial conditions to be received over the period ahead will inform the Board's ongoing assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.