Despite rising commodity prices, the Australian central bank has been forced to hold interest rates steady, as consumer spending remains static.

According to financial markets, market participants are widely expecting that the Reserve Bank of Australia will hold interest rates steady well into 2011, unless there is a pick up in consumer spending.

Glenn Stevens the governor of the RBA recently said that households were “displaying a degree of caution” about spending, while he also pointed to continuing uncertainty in the world economy.

Mr. Stevens added that he expects core inflation, which strips out extreme price movements, to trend within the RBA’s inflation target range of between 2 to 3 per cent until the middle of next year.

Federal treasurer Wayne Swan said the decision by the central bank to hold interest rates steady was a tribute to the government’s economic policy, and said the current interest rates were 2.25 per cent lower than when the current government entered office.

“The decision is certainly welcome relief for many families and businesses around the country,” the Treasurer said.

Recent retail and building industry statistics however suggest that both consumers and business continue to remain uncertain about the future.

Retail sales grew by only 0.2 per cent in May, with the annual growth rate of 1.9 per cent far below the long-term average of close to 6 per cent.

Department stores have been the worst affected, with their sales volumes declining 1.4 per cent during the June quarter, with cash spent declining by 2.2 per cent

Matthew Hassan an senior economist with Westpac says that the decline suggests that the average price of goods in department stores must have fallen by 0.8 per cent during the quarter, whilst clothing stores experienced an even larger fall in prices by 1.6 per cent.

He said clothing prices had dropped 5 per cent in the past year, the biggest decline since records started being kept in 1983.

Mr. Hassan says that household reluctance to spend is not as a result of lack of money, because even when interest rate rises have been accounted for, the growth in employment and wages has lifted disposable incomes by a healthy 0.4 per cent.