Holding pattern appropriate, says Australia's central bank

Australia's central bank kept its benchmark interest rate unchanged this month as risks in Europe abated and said it had scope to ease policy if demand were to "weaken materially," minutes of its February 7 meeting showed.

"While the financial situation in Europe remained fragile, the likelihood of an extremely bad outcome seemed to have diminished somewhat," said the minutes released yesterday by the Sydney-based Reserve Bank of Australia.

"With growth expected to be close to trend and inflation consistent with the target, the board considered that this setting was appropriate for the overall macroeconomic outlook."

The minutes echo the RBA's statement after this month's policy meeting where it unexpectedly held rates at 4.25 per cent after two quarter-percentage-point reductions late last year.

RBA Governor Glenn Stevens and his board noted in the minutes that the cuts "had been passed through to most lending rates in the economy, which were now around average levels".

Since the meeting, Australia's four biggest banks raised their standard variable mortgage rates independently from the RBA, drawing criticism from the Government.

The central bank noted in the minutes that competition for deposits, recent covered bond sales and the cost of swapping funds raised offshore into Australian dollars had added to the price lenders paid to raise money.

"Collectively, these developments had increased banks' overall cost of funding relative to the cash rate and had narrowed the difference between banks' lending rates and funding costs," the minutes said.

Commonwealth Bank of Australia increased the interest on a variable rate home loan by 10 basis points to 7.41 per cent last week, followed by National Australia Bank, which added 9 basis points to 7.31 per cent.

Westpac Banking boosted the cost by 10 basis points to 7.46 per cent on February 10, after Australia & New Zealand Banking Group added 6 basis points to 7.36 per cent. ANZ Bank and Westpac cited higher debt premiums and competition for deposits.

The central bank yesterday reiterated its comments at the February 7 meeting that policy makers "judged that if demand conditions were to weaken materially, the inflation outlook would provide scope for a further easing in monetary policy".

The RBA aims to keep inflation between 2 per cent and 3 per cent on average and policy makers said recent data confirmed core inflation was now in the mid-point of the target range.

The minutes suggested the central bank was "on hold for some time," said Adam Carr, a senior economist in Sydney at ICAP Australia, a unit of the world's biggest interdealer broker. "Even if you're pessimistic, it's going to take time for that to be reflected in the data given its current momentum."

The improvement in the global and domestic economies prompted investors to pare bets on a rate cut next month to 32 per cent, according to a Credit Suisse Group Index.

The currency's strength is hurting Toyota's Australian division, the country's largest car exporter, which said last month it would cut more than a tenth of the employees at its assembly plant after a 21 per cent decline in 2011 production. General Motors' local unit has also announced job cuts.

Australia recorded its worst annual jobs growth in 19 years last year as Europe's escalating debt crisis damaged confidence.

The jobs market has shown signs of revival this year as employers added the most workers in 14 months last month and the unemployment rate unexpectedly declined to 5.1 per cent.

"Members observed that it appeared that additional demand for labor had been met largely through existing employees working longer hours over the past year, rather than through an increase in hiring," the minutes showed.

- Bloomberg