Businesses should not hold their breath waiting for further interest rate cuts, after the Reserve Bank kept rates on hold yesterday, pointing to stronger business borrowing and robust economic growth.
Although economists still expect one or two rate cuts in coming months, RBA governor Glenn Stevens's statement accompanying the decision to keep the cash rate on hold at 3.5 per cent for the second month contained no hint of bias towards cutting interest rates further.
"It interestingly appears to reverse the well-worn argument that the weak global backdrop means the next move in rates is still probably down," said Citi economist Josh Williamson, who suggested the bank would only cut further if Europe's economy worsened dramatically.
Mr Stevens said: "With inflation expected to be consistent with the target and growth close to trend, but with a more subdued international outlook . . . the stance of monetary policy remained appropriate." He added it was "too soon to see the full impact" of the cuts in May and June.
He pointed out that business credit "recorded its strongest growth over the past six months for several years".
The RBA's fears earlier in the year that Europe's debt crisis would push up borrowing costs for global banks appear to have waned.
Mr Stevens said capital markets "remain open to corporations and well-rated banks have no difficulty accessing funding".
He also said interest rates for local borrowers, which had fallen about 60 basis points since May, were below 2011 levels and the medium-term average.
JPMorgan chief economist Stephen Walters expects the RBA to upwardly revise its forecasts for Australian GDP growth by half a percentage point on Friday, in light of recent data suggesting retail sales are growing strongly and surprisingly rapid economic growth in Australia over the year to March," Mr Walters said.
"The RBA seems likely to be on hold for some time yet.
"Even with job shedding in some industries, the rate of unemployment has thus far remained low."
Over the year to May, mining firms have generated more than 50,000 new jobs while manufacturing work has fallen by about 10,000.
RBA officials have stated more than once that they expect the unemployment rate to creep up a little in coming months.
The RBA's widely expected decision pushed the Australian dollar briefly back above $US1.06 to reach five-month highs, as investors, marking down the likelihood of further cuts, focused on Mr Stevens's remarks that China's growth had moderated to "a more sustainable pace" but "does not appear to be slowing further". It closed at $US1.0576.
Stocks enjoyed a 0.4 per cent boost in light of the news, too, with the S&P/ASX 200 closing near 4300 yesterday, its highest level since mid-May.
Mr Stevens said the exchange rate had remained high despite the decline in the terms of trade and the weaker global outlook.
Former RBA board member Warwick McKibbin suggested the RBA consider a Swiss solution to Australia's resurgent currency. Since September last year, Switzerland has supplied unlimited newly created Swiss francs to financial markets to prevent the exchange appreciation beyond Sfr1.20 for every euro.
Mr Stevens said: "The most significant area of weakness continues to be Europe, where activity has been contracting and policymakers confront the very difficult task of seeking to put both bank and sovereign balance sheets on to a sound footing."
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