RTTNews - Tuesday, the Reserve Bank of Australia decided to leave its key interest rate unchanged as expected for the second consecutive month.

At its meeting, the board maintained the cash rate at 3%. The central bank has slashed the cash rate by 125 basis points since December 2008 and the official cash rate now stands at its lowest level in 49 years.

Governor, Glenn Stevens said monetary policy has now eased significantly. Market and mortgage rates are at very low levels by historical standards and business loan rates stayed below average. Although much of the effects are yet to be realized, fiscal steps are supporting demand.

He said, Nonetheless the prospect of inflation declining over the medium term suggests that scope remains for some further easing of monetary policy, if needed. The central bank said the board will continue to monitor how economic and financial conditions unfold, and how they impinge on prospects for a sustainable recovery in economic activity.

The board noted that the economy has been contracting and capacity utilization declined to near average levels. The central bank sees the decrease in capacity utilization to continue for the rest of the year. Labor cost also started to fall on the back of weak labor demand. These conditions would possibly contribute to a decrease in inflation over the coming two years.

As companies are postponing their investment plans and seeking to reduce leverage, business borrowings are declining amid tight lending standards. By contrast, a pick up in housing credit demand indicates a stronger housing market activity later this year.

Australian quarterly national accounts data is due on June 3. The economy is expected to shrink 0.2% quarter-on-quarter in the first three months of 2009, following a 0.5% decline in the fourth quarter. If the Australian GDP declines in the first quarter, then it would mark the nation's first recession since early 1990s.

The government in its annual budget estimated the economy to contract 0.5% in 2009/2010 before growing 2.25% in 2010/2011.

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