RBA 'well placed' to respond to inflation rise or downturn

Australia's central bank is well positioned to respond to global and domestic economic risks or the threat of an acceleration of inflation, according to minutes of this month's meeting when it kept interest rates unchanged.

"A key question for members was the extent to which recent global and domestic developments would reduce capacity pressures in the economy and, in due course, help to contain inflation," the Reserve Bank of Australia minutes showed.

"Members considered that the current setting of monetary policy left the board well placed to respond to evolving global and domestic economic conditions."

Governor Glenn Stevens has kept the overnight cash rate target at 4.75 per cent this year as monthly employment growth averaged 2800 from January through August, less than a 10th of the average of 30,500 job gains in the first eight months of 2010. That's the highest benchmark borrowing cost in the developed world, compared with rates near zero in Japan and the US and 1.5 per cent in the euro area.

While Stevens and his colleagues on the RBA board discussed the possibility of a rate increase at their August 2 meeting, yesterday's minutes indicate no such discussion about policy tightening took place.

"It was increasingly apparent that the economy was going through a period of considerable structural change and that this was causing difficulties in a number of industries," the minutes said.

"The near-term growth outlook looked somewhat weaker than had been expected earlier, but the medium-term outlook still appeared positive, providing that the world economic outlook did not continue to deteriorate."

Stevens has relied on a record-high currency to help contain inflation that is also hurting industries not connected to the nation's mining investment boom.

Driving Australia's economy is demand from developing nations including China and India for iron ore, coal and natural gas.

That has spurred the nation's currency, which reached US$1.1081 on July 27, to the highest level since it was freely floated in 1983.

Those gains made it harder for non-mining industries to compete, with BlueScope Steel last month saying it will cut about 1000 jobs because of a second-half loss through high raw material costs and exchange-rate gains.

Unemployment in August rose for a second straight month, reaching a 10-month high of 5.3 per cent, which is still lower than the US's 9.1 per cent and joblessness in the euro area near 10 per cent.

"The international outlook had become significantly more clouded since the previous board meeting," the minutes showed.

Stevens will lower rates by at least 75 basis points by December, interbank cash-rate futures showed before the minutes were released. RBA policy makers discussed investors' expectations for "large cuts" in the cash rate by year end, the minutes showed. "A range of technical factors meant that market pricing might not be giving an accurate reading of expectations in the current circumstances."

Clouding Australia's outlook is concern the world's largest economy is slowing. Employment in the US unexpectedly stagnated in August as employers became less confident in the strength of the recovery, according to a September 2 report.

In Australia, employment growth has "clearly slowed" from the rapid pace seen in 2010, policy makers said in the minutes.

"Liaison suggested that a rising number of firms were reassessing their hiring plans."

Australia's economy grew 1.2 per cent last quarter, the fastest pace in four years, driven by recovery from natural disasters in the northeast of the nation.

The central bank aims to keep underlying inflation in a 2 per cent to 3 per cent range on average.

- Bloomberg