Tuesday, the Reserve Bank of Australia held its key interest rate unchanged as expected at a 49-year low.

At its meeting, the Board decided to leave the cash rate unchanged at 3% after cutting it by quarter points on April 7. 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.

RBA Governor, Glenn Stevens said, In assessing whether further reductions in the cash rate are required over the period ahead, the Board will 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 shrank during the latter part of 2008 and continued the trend to date on weak domestic and global demand. Capacity utilization dropped to around average levels and the central bank sees further decline for the remainder of the year. Meanwhile, labor cost growth is likely to drop due to easing labor demand.

Considering these factors, inflation is expected to continue to abate, though this is happening only gradually so far.

While borrowing for housing is picking up, business borrowing is declining as companies curtail their investment plans and seek to reduce leverage. Market and mortgage rates stayed at very low levels and business loan rates stood below average levels, reducing debt-servicing burdens significantly.

According to the central bank, the monetary policy stance, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead.

Modern Australia has experienced a number of recessions, said Stevens in a speech titled The Road to Recovery on April 21. On that count, the current episode will be the eighth recession since World War II.

Stevens said then, Australia's genuine long term economic prospects remain good, and there remain good grounds to think that we will continue to weather the storm better than most.

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