The RBA board decided rates would remain at 4.75 per cent, the level reached when the official cash rate was pushed up by 25 basis points in November last year.Read the full RBA statementChronology of interest rate movements since 1990Home loan guide

The decision to leave rates unchanged was widely predicted by market watchers after recent economic data showed parts of national economy were still sluggish and Europe remained jittery about Greece's debt woes.

Those global worries and a slower-than-expected recovery from the summer's floods and cyclones prompted the central bank to hint at a lower growth outlook for the rest of the year. The shift in the bank's language was interpreted by economists as a signal that the RBA is less inclined to raise interest rates in the short term.

"The recovery (from the natural disasters) will boost output over the months ahead, and there will also be a mild boost to demand from the broader rebuilding efforts as they get under way, but growth through 2011 is now unlikely to be as strong as earlier forecast," RBA governor Glenn Stevens said in a statement.

The weaker growth at home comes as the global prospects are starting to dim in the wake of Japan's massive earthquake in March and the recent renewed debt crisis in Europe.

"The global economy is continuing its expansion, but the pace of growth slowed in the June quarter," the RBA said in its statement, adding that "a key question is whether this more moderate pace of growth will continue".

In the RBA’s May Statement on Monetary Policy it forecast the economy would grow by 4.25 per cent by December 2011. Singapore-based Roland Randall of TD Securities said 3.5 per cent over 2011 looks more achievable.

"This is not a central bank preparing the market for higher rates any time soon," said Mr Randall.

"A rate hike in August seems very unlikely, although we do still have the consumer price index data on 27 July to see before we can be definitive."

Dollar drops

The dollar fell about a third of a US cent to $1.067, as economists and investors absorbed the RBA's less bullish outlook. Stocks were little changed.

‘‘I think the statement is notably less upbeat than previous statements,’’ said ANZ economist Katie Dean.

‘‘It does look like the RBA has become more concerned not just about the domestic economic outlook but the global economic outlook.’’

Ms Dean said any rate rises during 2011 were now unlikely.

‘‘Even though their central forecast is for solid global growth I think they are more concerned about the downside risks to that,’’ she said.

Moody’s Economy.com’s analyst Katrina Ell said the RBA was now predicting a slower pace of global growth with implications for Australia.

‘‘Concerns about the global outlook and soft domestic data outside of mining are keeping policymakers on the sidelines,’’ said Ms Ell.

‘‘Second-quarter inflation data will determine the pace at which rates need to rise ahead,’’ she said.

Global concerns

The RBA board highlighted dangers to Australia's growth prospects in the wake of the Japanese earthquake and the renewed debt crisis in Europe, centred on Greece.

"The supply-chain disruptions from the Japanese earthquake and the dampening effects of high commodity prices on income and spending in major countries have both contributed to the slowing," the RBA statement said.

"The banking and sovereign debt problems in Europe have also added to uncertainty and volatility in financial markets over recent months."

Decision avoids 'rate hike damage'

The decision was welcomed by the Housing Industry Association's chief economist Harley Dale, who said a rise in rates would be ‘‘nothing but a blight on the current Australian economic landscape’’.

"There’s far more to the picture in the post-GFC world than the endless swirl of data updates, although on the new housing front these updates are unequivocally weak," Dr Dale said in a statement.

He said household confidence appeared fragile, caught between rates uncertainty and ‘‘constant dribble’’ about a fictitious house price bubble.

"In this environment a rate hike would do considerably more damage than might have historically been expected, not in the least to the housing industry, and the Reserve Bank Board seem to understand that,’’ he said.

In a recent Bloomberg survey of economists, all 28 participants expected interest rates to be left on hold today.

Many predicted rates would start rising around the middle of 2011, but the Australian economy, after avoiding the worst of the financial crisis in 2008, has not rebounded as quickly as forecast.

While investment in mining continues to drive resources-related industries, ANZ job ads - a forward look at the labour market - dropped in May and posted only a modest recovery in June.

Softer house prices, combined with recent plunges on global share markets triggered by the euro debt crisis, has undermined consumer confidence at a time when households are facing higher costs of living.

This made the prospect of an interest rate rise potentially damaging for the spending and borrowing needed to keep the economy growing.

In recent months, the RBA has repeatedly stressed that the mining boom will trigger higher inflation over the next 12 to 24 months, potentially requiring higher rates.

czappone@fairfax.com.au

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