The Reserve Bank of Australia kept its cash rate unchanged at 3 percent as expected and said it sees room to cut interest rates if needed as inflation remains low.
"With inflation likely to be consistent with the target, and with growth likely to be a little below trend over the coming year, an accommodative stance of monetary policy is appropriate," Governor Glenn Stevens says in a statement.
"The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand."
The Australian dollar fell to $US1.0397 at 5pm in Wellington from $US1.0437 immediately before the statement was released. Traders see 36 basis points of rate cuts by the RBA over the next 12 months and the statement today helps reinforce that view.
Mr Stevens says the Australian economy is still to feel the full impact of monetary easing through 2012, though there are already signs that the interest rate cuts are starting to bite, including early indications of a pickup in home building, rising house prices and increased demand for some consumer durables.
Inflation is consistent with the bank's medium-term target, with both headline and underlying measures at about 2.25 percent, he says. The Australian dollar was "higher than might have been expected" given falling export prices and low demand for credit.
A softening labour market and rising unemployment are helping keep a lid on wage inflation, he says.
The near-term outlook for investment outside of the resources sector remains "relatively subdued". In the resources sector itself, the peak in investment is nearing, reiterating the view of previous statements.
Globally, growth is forecast to remain below average for some time though the downside risks are abating. The US has avoided a severe fiscal contraction and financial strains in Europe have "lessened considerably over recent months".
Growth in China "has stabilised at a fairly robust pace", he says.
Sentiment in financial markets has improved and high-rated sovereigns such as Australia face long-term interest rates at exceptionally low levels.
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