Global crises give RBA scope to hold the line

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Australia's central bank had scope to extend an interest-rate pause because risks posed by Europe's debt crisis and a slower-than-forecast domestic recovery eased inflation concerns, minutes of its July 5 meeting showed.

"The flow of recent information suggested both that there was more time to assess the likely strength of inflationary pressures in Australia and that it would be prudent to use that time," according to the minutes released yesterday by the Sydney-based Reserve Bank of Australia. "Growth in aggregate demand was not showing signs of a further pick-up yet."

RBA Governor Glenn Stevens has kept the official cash rate unchanged since November 2010 as the economy recovered from the country's costliest floods and the labour market lost 5400 jobs in the April-June period, the weakest quarter since 2001. At 4.75 per cent, the rate is the highest among the world's developed economies.

The RBA saw wages pressures emerging in some mining-related occupations "but these pressures remained fairly localised", the minutes said. The July 27 release of the second-quarter report on consumer prices would be "important in helping to shape views about inflation, and therefore the future path of interest rates", the minutes said.

Government bonds extended this month's rally after the RBA release. The minutes reflected a central bank that saw sovereign debt woes in Europe, particularly in Greece, as "a significant downside risk for the global economy" and a US economy where "growth had moderated". The minutes said RBA board members viewed the labour market as "not tightening significantly further at present".

Australia's recovery from flooding earlier this year in Queensland, the nation's biggest coal exporting state, was proceeding more slowly than the central bank had predicted, according to the minutes. The multi-speed nature of the economy was "clearly evident" in recent economic reports, it said.

Since the RBA's last meeting, private reports have shown weaker business and consumer confidence.

Consumer sentiment this month plunged by the most since Lehman Brothers Holdings collapsed in 2008, a survey from Westpac Banking and Melbourne Institute showed. "The household sector continued to be cautious in its spending and borrowing behaviour," the minutes said.

- BLOOMBERG