The Reserve Bank of Australia has held the official interest rate at a record low but is still keeping an eye on inflation.
The RBA left the cash rate at 1.75% at its June board meeting on Tuesday, a month after cutting it by 25 basis points.
The central bank’s primary concern is faltering inflation, which fell 0.2% in the March quarter.
“Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time,” said its governor, Glenn Stevens.
But Stevens also flagged “a very large decline in business investment”.
Business investment in capital goods, which includes buildings and equipment, fell 5.2% in the March quarter – much worse than forecasts of a 3.5% fall.
The HSBC chief economist, Paul Bloxham, said the mining downturn was behind the investment slump but the key question was when other sectors would fill the gap and generate a pickup in inflation.
“The RBA are of the view that inflation is going to stay low for quite some time, so that leaves them with scope to cut further,” he said.
CommSec’s chief economist, Craig James, said the central bank would reconsider rates in August after assessing the next batch of inflation data, the Brexit vote and the next two US rate decisions.
“It all depends on the Reserve Bank’s assessment on how fast the economy can grow without generating inflation above the upper end of the 2% to 3% target band,” James said.
Meanwhile, the RBA said improved supervisory measures and more cautious lenders were keeping the housing market under control.
“Holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time,” Stevens added.
