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RBA takes a wait and watch approach to interest rates

Tuesday 15th June 2010

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The Reserve Bank of Australia, the first to resume raising interest rates in the wake of the global financial crisis, says it can now afford to pause while it assesses the health of the world’s economy and the pace of inflation.

The RBA kept its benchmark interest rate unchanged at 4.5% this month after six increases in eight months pushed borrowing costs to “around their average levels of the past decade or so,” according to minutes of the bank’s June 1 Monetary Policy meeting.

“Members judged that 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 RBA said. “For the near term, therefore, members judged that is was appropriate to leave the cash rate unchanged.”

Australia managed to skirt the global recession, helped by demand for its raw materials in China. The economy grew 0.5% in the first quarter, having expanded 1.1% in the final three months of 2009, helped by the federal government’s fiscal response to the downturn. Standing pat on rates means New Zealand has scope to narrow the gap, with Governor Alan Bollard raising the official cash rate a quarter point to 2.75% last week.

Much of the minutes were devoted to considering the debt crisis in Europe and its potential to harm the domestic economy.

“The situation in Europe had deteriorated significantly over the previous month,” the RBA said. “The difficulties in Europe would inevitably weigh somewhat on prospects for global growth.”

Still, in Australia, credit markets “had continued to function well, albeit with slightly increased volatility.” Australian banks had no pressing need to tap term debt markets “for several months” because they were ahead of their funding needs for the year.

There were indications of “good underlying demand for Australian bank debt in overseas markets,” the RBA said.

The global economy has become more uncertain, though the medium-term outlook “remained positive” for Australia. 



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