RBA likely to resist adding to its six rate rises

The Reserve Bank of Australia's decision to return borrowing costs to average levels gave policymakers flexibility to pause this month and gauge any fallout from Europe's debt crisis, a record of their meeting showed.

"In considering the setting of monetary policy, members noted that the situation in Europe had deteriorated significantly," RBA officials said in minutes of their June 1 gathering released in Sydney. "Difficulties in Europe would inevitably weigh somewhat on prospects for global growth."

Yesterday's report underscores forecasts for the RBA to hold off for now on adding to the six interest-rate increases since early October.

Governor Glenn Stevens and his colleagues judged that inflation figures due late next month will help show the degree of price pressures in the economy, the minutes said, offering an "explicit guide" that rates will be left unchanged next month, said Rob Henderson at National Australia Bank.

"The key to the minutes is that having increased interest rates back to normal levels, they've given themselves some flexibility in dealing with the current situation in Europe," said Sydney-based Henderson, who has analysed the Australian economy for more than three decades and served as an adviser to former Prime Minister Bob Hawke.

The RBA left borrowing costs unchanged this month, halting the most aggressive round of interest-rate increases in the Group of 20. While the global environment facing Australia's economy has become more uncertain, the "medium-term outlook remained positive", policymakers said yesterday.

"These previous actions afforded 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," the Reserve Bank of Australia minutes said.

A report published the day after this month's board meeting showed economic growth slowed to 0.5 per cent in the three months through March 31 from the previous quarter, when it surged 1.1 per cent, with government spending helping to counter weakening consumer demand.

"Domestically, members observed that conditions had been mixed," the bank said. "There had been a high level of activity in the construction sector from the fiscal stimulus, but retail spending had been relatively subdued and there were some signs of slowing in the housing market."

A 20 per cent surge in property prices in the 12 months to March 31 was a key reason policymakers increased the benchmark overnight cash rate target to 4.5 per cent last month from early October, when the rate was at a half-century low of 3 per cent.

"Members noted some signs that the earlier buoyancy in the housing market was easing," the minutes said.

The decision to keep borrowing costs unchanged on June 1 followed a month of turmoil on global markets as investors expressed concern that sovereign debt levels in some European countries may undermine recoveries.

Greece's credit rating was cut four steps on Monday to non-investment grade, or junk, by Moody's Investors Service, which warned of the rising economic cost of the debt-strapped country's budget cuts.

"Notwithstanding the actions that had been taken by European policymakers and the International Monetary Fund, the situation remained uncertain," the RBA minutes said.

"Market confidence had been severely eroded, and some governments were now in the very difficult position of having to tighten fiscal policy at a time when growth remained weak."

Europe's troubles triggered a 7 per cent fall over the past month in Australia's dollar on a trade-weighted basis, the RBA said.

- BLOOMBERG