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Australian central bank holds interest rates at 3.5%

SYDNEY -- Australia's central bank held interest rates steady at 3.5 percent for a third consecutive month Tuesday, saying domestic indicators were encouraging despite a weakening global outlook.

Reserve Bank of Australia governor Glenn Stevens said domestic growth was running close to trend and inflation was low, offsetting an easing in the world outlook which had seen commodity prices fall sharply in recent weeks.

Earlier aggressive rate cuts — 50 basis points in May and 25 points in June — were still working their way through the economy and, on balance, Stevens said the bank's board had decided to adopt a wait-and-see approach.

“With inflation expected to be consistent with the target and growth close to trend, but with a more subdued international outlook than was the case a few months ago, the stance of monetary policy remain(s) appropriate,” Stevens said.

The Australian dollar lifted slightly to US$1.0244 from US$1.0234 on the rates pause, which had been widely expected by analysts.

Stevens said the global outlook remained on the downside, with Europe contracting and the United States seeing only modest growth, leaving investors with little appetite for risk.

China had been “reasonably robust” in the first half of 2012 “albeit well below the exceptional pace seen in recent years,” dampening growth in Asia more broadly and slamming the prices of key commodities including iron ore.

Despite the mining slowdown, which has seen companies including BHP and Fortescue Metals scale back expansion plans, Stevens said Australia's economy seemed to be growing “close to trend,” owing to a boom in resources investment.

Consumer spending was “quite firm,” house prices and business investment had lifted and the labor market had continued to grow despite job cuts in some sectors.

Inflation was at around 2 percent, well within the bank's target range.

Importantly, Stevens said the bullish Australian dollar, which has run consistently at or above parity with the greenback for almost two years, had fallen slightly, “though it has remained higher than might have been expected.”

Industries such as tourism, education and manufacturing have been hit hard by the high dollar, and BHP recently said the exchange rate was a factor in its decision to shelve its mammoth Olympic Dam copper and uranium mine expansion.

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A man walks before the Reserve Bank of Australia in Sydney, Tuesday, Sept. 4. Australia's central bank held interest rates steady at 3.5 percent for a third consecutive month Tuesday, saying domestic indicators were encouraging despite a weakening global outlook. (AFP)

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