RBA Minutes

The RBA seems pretty confident in China’s outlook, noting that “ recent indicators did not suggest a more marked slowdown than the staff had been expecting”.

The RBA expects underlying inflation to track within the target band coupled with a slowing in the domestic economy. They noted that “consumer spending remained subdued,...credit growth remained soft (and)... the housing market had stabilised”. The RBA Board seems very comfortable on hold.

Their Conclusion is pasted below:
(Link to full statement)

Considerations for Monetary Policy

Members noted that sentiment in financial markets had improved over the past month, particularly following the publication of the results of the stress test of the European banking system. Volatility in financial prices nonetheless was still higher than normal. The economic data suggested that the global economy was continuing to expand, though the pace of growth had probably eased since earlier in the year and it was still uneven among regions. Growth remained generally subdued in the North Atlantic countries that had been most affected by the financial crisis, though recent indicators for Europe had been more positive. Growth in the United States had moderated since the start of the year. The Asian region had experienced very strong growth, though it looked now to be slowing to a more sustainable rate. The moderation in growth in the Chinese economy had contributed to some easing in commodity markets, but the prices of Australia’s major export commodities were still at very high levels.

The major news in the domestic economy had been that underlying inflation had continued to fall, in line with the Bank’s expectations, and was now below 3 per cent. Were it not for the effect of the rise in tobacco excise earlier in the year, CPI inflation would have remained below 3 per cent. Employment had continued to grow solidly but consumer spending remained subdued, even though confidence was high. Credit growth remained soft and the housing market had stabilised after the surge in prices late last year and earlier this year. Indicators of business investment remained strong. The staff forecast continued to suggest that GDP growth would strengthen in 2011 and 2012 to above-average rates. Accordingly, even though underlying inflation was expected to remain around 2¾ per cent over the next year, it was forecast to pick up a little thereafter.

Over late 2009 and early 2010, the Board had removed the unusual degree of monetary accommodation that had been put in place during the global financial crisis. By May, interest rates on loans to households and businesses had returned to around average levels. In the subsequent two months, with economic growth close to trend and inflation expected to decline to the target range later in the year, the Board had felt comfortable with the existing level of interest rates, particularly in an environment where there was a significant degree of market volatility.

Developments over the latest month had not materially changed the Board’s assessment. The inflation data released during the month were in line with the Board’s expectations for a decline, and the outlook for economic growth had not changed. Markets had settled somewhat, but there was still more uncertainty over the global outlook than there had been earlier in the year. The Board therefore judged the existing level of the cash rate as still appropriate, and decided to leave it unchanged for the time being, pending further information.

The Decision

The Board decided to leave the cash rate unchanged at 4.5 per cent.