Interest rates have been kept on hold

The Reserve Bank has granted Australia's borrowers a reprieve, leaving interest rates unchanged for a fifth month as inflation remains subdued even as the economy gathers pace. The dollar sank on the news.

The central bank left its key cash rate at 4.5 per cent, defying widespread expectations that it would increase it to 4.75 per cent.

Holders of a typical $300,000 mortgage are already paying $300 a month more than they were a year ago, when the RBA began the first of six rate rises to bring borrowing costs back towards their long-term levels as the economy bounced back.

The reprieve for borrowers may be short-lived, though, with the big commercial banks flagging their intention to pass on rising funding costs in the form of higher interest rates - perhaps as early as today.

And the prospect of an official rate rise still looms after the RBA hinted strongly last month it will use rate rises to combat inflation pressures from the booming commodity export sector. Inflation figures for the September quarter are due on October 27, just days before the central bank's next interest rate meeting.

The Australian dollar shed almost three-quarters of a US cent on the news as investors pared back their expectations of higher rates ahead. It traded recently at just over 96 US cents.

Chris Zappone - The Age