RBA keeps rates steady

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The Reserve Bank today left interest rates on hold at 5.5 per cent in the face of growing questions over the strength of the economy.

Economists had expected the bank to follow through with another quarter per cent rate increase, following its March increase.

But key economic indicators are now suggesting the economy is slowing, and the high price of oil has hit the spending power of consumers.

John Howard had earlier warned the Reserve Bank to take heed of the crippling cost of spiralling petrol prices, amid high-level concerns that rising interest rates were damaging his Government's political standing.

The Prime Minister conceded interest rates could not stay on hold forever but said the rise in petrol prices - with the price of crude oil hitting a new high in New York yesterday of US$58.28 a barrel - was hurting the hip pockets of most Australians.

"I am very aware of how much the higher price of petrol is costing people," he told Sydney radio before the Reserve Bank's monthly board meeting.

"That is something that is having a direct impact on consumer demand, because if you have to spend all those more dollars a week on petrol you don't have it to spend on something else."

His blunt warning came as Assistant Treasurer Mal Brough suggested last month's rate rise had already caused a fall in consumer spending, reducing the need for further tightening of monetary policy.

"The general feedback that I've received, anecdotally, is that consumer demand in the retail sector has come off its peak," Mr Brough told The Australian yesterday.

The Howard Government is concerned over the recent increase in petrol prices to record levels, with regional MPs in particular raising concerns about the effect on voter sentiment.

The debate over rates came as car sales figures showed strong growth in demand, up 4.5 per cent, for new cars in the first quarter of the year.

And in a further sign of solid consumer spending, new figures revealed yesterday revenue from GST collections were on track to hit record levels.

While receiving good economic news with the trade deficit falling slightly to $2.2 billion in February, senior Coalition figures are still worried the slowing economy and rising mortgage rates are raising doubts among voters of the Government's economic credibility.

The latest Newspoll, published in The Australian yesterday, showed a turnaround in voter support, with Labor leading the Coalition on a two-party-preferred basis for the first time since the October 9 election.

Labor Treasury spokesman Wayne Swan said yesterday he had no doubt the upward pressure on rates was a factor in the Newspoll swing.

While Mr Howard insists the economy remains "fundamentally strong", he said there was no doubt it was slowing.

An analysis by Macquarie Bank shows the Government is right to be concerned about petrol prices slowing consumer demand, with a 10c-a-litre rise having about the same effect on household budgets as a 0.25 point rate rise.

But Macquarie also says the higher petrol prices will flow through to higher prices overall, which is the Reserve's biggest worry.

The bank justified its decision to raise interest rates last month by saying there was a risk its forecast of inflation rising to 3 per cent by the end of next year might prove too optimistic.

Macquarie Bank calculates a rise in the petrol price from $1 a litre to $1.10 would add 0.5 per cent to the inflation rate.

[ Last edited by 123游客123 on 2005-4-6 at 09:46 AM ]