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Aust. leaves rates on hold as economy eases

Australia's construction sector is continuing to perform strongly
Australia's construction sector is continuing to perform strongly  

By Geoff Hiscock
CNN Asia Business Editor

SYDNEY, Australia (CNN) -- Australia's central bank left rates on hold for the third straight month Wednesday, a day after the release of June quarter figures showing lower than expected economic growth.

The decision by the Reserve Bank of Australia to leave the official cash rate at 4.75 percent came as no surprise.

Analysts now expect one rate rise to 5 percent by the end of the year. The bank last moved in June, lifting the cash rate by a quarter of a percentage point from 4.5 percent.

The Australian dollar is about half a percent weaker at 54.44 U.S. cents in Wednesday morning trade.

On the stock market, the benchmark S&P/ASX200 index is down almost 1 percent to 3114.0. The Australian market was one of the few in Asia to stay in the black Tuesday, but the heavy fall overnight on Wall Street has seen it open lower Wednesday.

The central bank's widely anticipated decision follows the release of national accounts figures by the Australian Bureau of Statistics on Tuesday showing gross domestic product rose 0.6 percent in the June quarter, following a 0.7 percent rise in the first quarter.

Year on year, the economy grew 3.8 percent in the June quarter.

Still a high rate

While this is slightly lower than the 4 percent expected by analysts, it is still among the highest rates in the world for developed economies.

UBS Warburg chief economist in Australia, Mark Rider, told CNN on Tuesday that a dip in June company profit data suggested economic momentum was not "quite as strong" as originally thought, but a growth figure of about 4 percent for the year was still likely.

He said the weaker Australian dollar and a strong housing sector had helped the Australian economy out-perform the rest of the world recently.

Rider said he expected housing investment would stay at a high level before falling at the end of the year. Housing-related spending would also moderate.

The result would be a slowdown in annual growth to about 3 percent by the middle of next year.

One more rise tipped

As expected, the Reserve Bank of Australia left rates on hold on Wednesday
As expected, the Reserve Bank of Australia left rates on hold on Wednesday  

The Reserve Bank has said in recent months that it wants to move to a "neutral" rate setting, which the market interprets as about 5.5 percent.

But Rider said he now believed there would be only one more rise of a quarter of a percentage point to 5.0 percent from the RBA in the current cycle.

Nomura Australia economist Tom Kenny said in a commentary after the release of the GDP figures that the tentative signs of a slowing economy, along with increased global uncertainty, would motivate the bank to "stay its hand" on rates.

"We think that growth likely peaked in the 1H02 (the first half of 2002), with activity driven by a voracious consumer and a boom in housing activity," he said.

"These forces are expected to moderate in 2H02; the housing boom has run its course and consumers are close to finding the bottom of their pockets."

Kenny said that if the economy was to continue to make headway, business investment needed to be stepped up.

But he noted that any plans were vulnerable to global developments.

The Australian Bureau of Statistics said the spending side of GDP was driven by domestic demand and the housing sector.

On the production side, it said the main contributors were the construction industry, and health and community services.




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