Rates on Hold Due to EU Fears: RBA
UNCERTAINTY over the European debt crisis prompted the Reserve Bank of Australia (RBA) to leave the cash rate on hold, the minutes of the bank's June board meeting show.
But the minutes also show the central bank remains positive about the medium-term outlook for the Australian economy, despite a month of patchy economic data. At its June 1 board meeting, the RBA held the cash rate at 4.5 per cent.
It had taken the rate higher six times since the beginning of October 2009, when the rate was at a 49-year low of three per cent.
"Members judged that these previous monetary actions afforded policy the flexibility to await information on how the recent market uncertainty might affect the global economy, as well as the outlook for inflation," the minutes, released on Tuesday, said.
The bank said most of the market uncertainty came from Europe amid fears the debt crisis currently gripping Greece, Spain and Portugal could spread to other EU nations. "Sentiment has deteriorated sharply in the period following the previous board meeting as concerns about the fiscal position of Greece, Spain and Portugal intensified," the minutes said.
"Some governments were now in the very difficult position of having to tighten fiscal policy at a time when growth remained weak." The RBA said it would wait and see if and how the volatility in global markets would affect Australia and the rate of inflation.
Despite spending a large portion of the minutes discussing the pessimistic European landscape, the RBA said it remained optimistic about the medium-term outlook for the Australian economy. "While the international environment facing the Australian economy had become more uncertain, members noted that the medium term outlook remained positive," the bank said.
Recent economic indicators had been mixed, the RBA said. High levels of activity in the construction industry were the result of federal government stimulus measures, while retail spending had been subdued amid signs of a slowing housing market.
In contrast, local business confidence and conditions were above long-term average levels amid signs financing for businesses and firms were improving, but still remained tight. "Most indicators suggested that the economy was continuing to expand and employment growth had been solid.
"Conditions, however, clearly differed across sectors and aggregate spending was still being supported by public (sector) demand." The bank also noted that expected disinflationary pressures in the economy had not turned out to be as strong as expected. Wages growth in the private sector had accelerated in the first quarter of the year, while public sector wages remained firm and above the average of the past decade.
"While recent data for prices and wages suggested that the disinflationary forces in the economy were not quite as strong as previously expected, global events could also have implications for the inflation outlook for the medium term."
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