Reserve Bank sees scope to reduce interest rates

RBA Chairman Glenn Stevens. Photo / Getty Images

Australia's central bank saw scope to reduce the nation's benchmark interest rate from a developed-world high if needed as a slower domestic economy eased inflation concern, minutes of its October 4 meeting showed.

"It was likely that growth over the forecast period would be somewhat slower and that the labour market would be less tight than forecast," the minutes released yesterday by the Reserve Bank showed.

"This prospect, as well as the lower starting point for inflation, meant that the inflation outlook appeared less concerning than was the case a few months ago."

The Australian dollar pared gains as traders boosted bets RBA Governor Glenn Stevens will lower the overnight cash rate target from 4.75 per cent, where he has held it for the past 11 months as employment growth slowed and global risks rose. The weaker outlook and declining confidence reflect a European sovereign-debt crisis and a tumble in shares that erased A$10 trillion ($12.8 trillion) worth of equities worldwide last quarter.

"There has been a significant change at the Reserve Bank over the past couple of months," said Brian Redican, senior economist in Sydney at Macquarie Group, Australia's biggest investment bank. The minutes provide "a lot more detail about how far they think the inflation outlook has improved so I think that adds a bit of solidity to the changing view," he said.

The central bank aims to keep inflation in a 2 per cent to 3 per cent range on average, and the third-quarter consumer-price index report is due on October 26. Recent changes to CPI data by the statistics bureau showed underlying inflation figures were "lower than those previously published," the minutes said.

RBA staff estimated that underlying inflation over the year to the June quarter would have been 2.25 per cent to 2.5 per cent, rather than 2.5 per cent to 2.75 per cent.

The RBA noted the reweighting took account of changing spending patterns, including consumers switching their expenditure toward goods and services whose relative prices had fallen, such as computing equipment.

Another difference was the exclusion of the interest margin measure in the deposit-and-loan facilities category of CPI, "which had been a source of volatility in inflation outcomes over recent years," it said.

The Australian dollar pared gains immediately after the release of the minutes from $1.0202 before the announcement and $1.0157 yesterday in New York. It bought $1.0208 at 12.43pm in Sydney, up 0.5 per cent from late yesterday in New York.

The minutes showed officials viewed the pace of near-term economic growth as "unlikely to be as strong as earlier expected," reflecting global and local factors.

Traders bet there is a 76 per cent chance Stevens will reduce borrowing costs by 50 basis points by year end, up from 72 per cent before release of the minutes, interbank cash-rate futures showed. The RBA has relied on the Australian dollar's strength to temper gains in consumer prices. The local currency reached $1.1081 on July 27, the highest level since it was freely floated in 1983.

- Bloomberg