Central bank's decision to hold rates delicately balanced

The central bank's previous rate increases have helped push the Australian dollar to parity with the greenback. Photo / Supplied

Australian policymakers said their decision this month to hold the benchmark interest rate at 4.5 per cent was finely balanced as risks to global growth and a rising currency helped ease inflation concerns.

"The case to wait before making a tightening move was that the economy was still expected to continue growing at trend in the near term, credit growth had softened somewhat and the rise in the exchange rate would, if it continued, effectively be tightening financial conditions at the margin," the Reserve Bank of Australia said in minutes of its October 5 meeting released in Sydney yesterday.

Chinese demand for iron ore, coal and energy is prompting Chevron and other firms to boost investment, and a report two days after the meeting showed fulltime employment in the past two months was the most since 1988.

The central bank, which has led Group of 20 nations in raising borrowing costs six times in the past year, kept interest rates unchanged on October 5 for a fifth month.

"While the board recognised that it could not wait indefinitely to see whether risks materialised, members judged that they had the flexibility to do so on this occasion," the minutes showed.

A majority of economists surveyed by Bloomberg News before the decision expected a rate increase. The minutes showed the RBA debated that option.

"A case could be made to increase the cash rate at the current meeting, based on the medium-term inflation outlook and the fact that developments had continued to be broadly consistent with the central forecast scenario," they said.

The central bank predicts inflation will average 2.75 per cent until the end of next year, before accelerating to the top of the bank's 2 per cent to 3 per cent target range by mid-2012.

The RBA's measure of so-called core inflation slowed to 2.7 per cent in the second quarter from an annual pace of 3 per cent in the first quarter.

Inflation was expected to "remain in the target range over the near term" and the currency's rise would "help promote this outcome", the minutes showed.

The central bank's previous rate increases have helped make the Australian dollar the second-best performer among the 16 most traded currencies this year, gaining 10.2 per cent.

The local currency reached parity on Friday night for the first time since it began trading freely in 1983 as Federal Reserve officials consider additional monetary stimulus as the US economy loses traction.

Fed chairman Ben Bernanke and the Federal Open Market Committee are considering strategies, before their November 2-3 policy meeting, to purchase additional assets to help reduce unemployment persisting at more than 9 per cent.

In contrast, economic growth in Australia is expected to pick up from its current rate of 3.25 per cent to closer to 4 per cent "over the next couple of years", driven by domestic spending, central bank Deputy Governor Ric Battellino said this month.

Australian employers last month added the most workers since January, supporting central bank Governor Glenn Stevens' view of an economy that may strengthen.

Traders calculate a 34 per cent chance of a quarter-point increase in Australia's benchmark rate to 4.75 per cent next month, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange.

There's a 52 per cent chance of a move in December.

- BLOOMBERG