Members of the Reserve Bank of Australia's policy board felt at this month's monetary policy meeting that a wait-and-watch stance was warranted and that the print of the June quarter inflation data, which is due later this month, would direct their next policy move. The members also felt that holding interest rates steady was justifiable given rates had already returned to "average" levels.
The RBA board saw the decision to hold the cash rate at 4.50% to be appropriate given "increased international uncertainty." They noted that the coming month would see important announcements, such as the results of the European banking stress tests, "which had the potential to have a significant impact on financial markets and global confidence."
The members also said that they were awaiting the release of the June quarter inflation data, due on July 28, which they expect to show "further moderation" in the year-ended underlying rate, although underlying inflation "was likely to remain in the top half of the target range over the period ahead."
"The important question for the board at its next meeting would be whether the new information materially changed the medium-term outlook for inflation," the meeting notes said. They forecast headline inflation to rise above 3% due to the effects of some tax increases on tobacco. The RBA maintains an inflation target range of 2-3%.
The RBA felt that its earlier moves had given monetary policy "the flexibility" to await information on how the recent market uncertainty might affect the global economy, as well as news about the outlook for inflation. "Pending this information, the board judged that it was appropriate to leave the cash rate unchanged," the minutes said.
Australia was the first major economy to raise interest rates in the aftermath of the global financial crisis. Since October the central bank has hiked interest rates by 150 basis points, in contrast to central banks in other major economies in Europe, Japan and the U.S., which have held rates at, or close to, record lows.
The members noted that the global economy had continued to expand at around trend pace in recent months, although growth was uneven and developments in financial markets had "highlighted some important risks." They said the measures taken to combat Europe's debt problems should help the prospects for sustainable growth in the region over the longer term, but that the prospects for European growth going into 2011 were weaker.
In Asia where growth had been strong, members saw some moderation of this as "desirable," given concerns about possible overheating in those economies. "For Australia, a critical medium-term question was the extent to which economies in Asia could continue to grow strongly in the face of what could be an extended period of subdued conditions in the major North Atlantic economies," the minutes said. "Overall, members considered that the most likely outcome was for growth in Australia's major trading partners to be around trend over the next couple of years."
But while the international environment had become uncertain, the members noted that the Australian economy had continued to grow at a solid rate. They observed that the domestic economy was entering a phase in which strengthening private demand will offset the scaling back of public demand. "There were tentative signs that this 'hand over' from public to private demand may be starting to occur, though this would warrant careful monitoring," they said.
The RBA board noted that iron ore and steel prices had fallen due to a slowing in growth in Chinese steel production. "Nevertheless, these prices remained very high from a longer-term perspective, and the terms of trade were approaching the peak level seen in 2008," they said.
Australia has benefitted hugely from surging demand in China and other Asian economies for its large mineral resources. Official figures released earlier this month showed that the country's trade balance recorded a large surplus of A$1.65 billion in May compared to an upwardly revised A$1.12 billion surplus in the previous month. The rise was fueled by a large increase in exports of commodities such as coal, iron ore and non-monetary gold.
But various other domestic economic indicators have cooled off in recent times on the back of the RBA's aggressive rate rises. Retail sales slowed for the third consecutive month in May while building approvals and housing sales declined. Purchasing managers' surveys showed that Australia's manufacturing and services growth slowed down in June.
Copyright(c) 2010 News.com, Inc. All Rights Reserved
