The Reserve Bank has left official interest rates unchanged but given a clear signal a cut in coming months is still on the cards.
Following its monthly meeting today, the Reserve left the official cash rate at 2.25 per cent.
In a statement, governor Glenn Stevens said given rates had been cut last month, the bank board wanted to give the economy some time to absorb the lower lending costs.
But he also made clear that a further rate cut was likely.
“Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the (inflation) target,” he said.
In pointed comments about the economy, the governor said there were continuing signs it was slowing rather than accelerating.
“In Australia the available information suggests that growth is continuing at a below-trend pace, with domestic demand growth overall quite weak,” he said.
“As a result, the unemployment rate has gradually moved higher over the past year. The economy is likely to be operating with a degree of spare capacity for some time yet.
“With growth in labour costs subdued, it appears likely that inflation will remain consistent with the target over the next one to two years, even with a lower exchange rate.”
Markets had put the chance of a rate cut at better than 50-50. The same markets expect the Reserve to take the cash rate to 2 per cent by May.
The announcement followed figures from the bureau of statistics which showed a surge in building approvals for units across the country.
Through January, approvals of units jumped by almost 20 per cent. However, approvals of houses edged up by just 0.4 per cent to be lower over the past year.
In WA, private house approvals have fallen to their lowest level since late 2013.
Separate bureau figures showed an improvement in Australia’s balance of payments deficit to $9.6 billion which should add about 0.7 percentage points to tomorrow’s December quarter GDP result.
The same figures showed that Australia now owes almost $1 trillion to the rest of the world.
Net debt now sits at an all-time high of $925 billion, increasing by $38 billion over the previous three months.