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Reserve Bank keeps interest rate at 2 per cent, leaves door open for further cut

The Reserve Bank of Australia has left interest rates on hold at the historic low of 2 per cent, but opened the door for a rate cut.

The RBA left the official cash rate where it has been since May, saying in a statement that prospects for an improvement in the economy had strengthened a little in recent months, and leaving interest rates on hold was appropriate for now.

But the board said a soft inflation outlook may leave room for a further rate cut if needed.

“At today’s meeting the board judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate at this meeting,” Reserve Bank governor Glenn Stevens said.

“Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.”

Last week, the September quarter Consumer Price Index (CPI) showed annual headline inflation was running at just 1.5 per cent, which was weaker than expected and below the RBA’s forecasts.

Despite this soft inflation outlook, most economists had bet the central bank was unlikely to hand down a Melbourne Cup day rate cut, but said it was a very close call, given recent variable mortgage rate rises from the big banks.

They expect the central bank to revise its inflation forecasts in its upcoming Statement on Monetary Policy (SOMP) later this week.

The Australian Retailers’ Association (ARA) was “disappointed” with the RBA’s decision, saying it had come at the cost of much-needed Christmas spending for retailers.

“The ARA has been calling for a reduction in interest rates for some time, and we are disappointed that this has fallen on deaf ears,” executive director Russell Zimmerman said in a statement.

“An interest rate cut would have provided consumers with more discretionary dollars in their pockets and higher confidence, which generally leads to a greater willingness to spend.

“With one more meeting of the RBA before the end of calendar 2015, the ARA will be hoping for a last minute interest rate reprieve in December.”

The dollar jumped on the announcement and at 5:00pm (AEDT) was buying 72 US cents.

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