Minutes reveal RBA in no hurry to raise rates

15 September 2009

The central bank's decision to leave the cash rate at 3 per cent this month was made after its board weighed the risk of keeping rates too low for too long against the damage that might be done by jacking rates up too soon.

The minutes of the Reserve Bank monthly board meeting, released today, fleshed out the terse statement issued by governor Glenn Stevens two weeks ago on September 1, but did not change its emphasis.

"As at the previous meeting members noted that the policy decision in the near term involved balancing the risk of over-staying an accommodative stance, and that of prematurely tightening and adversely affecting confidence and demand,'' the minutes said.

This balance was best achieved by leaving the cash rate unchanged for the time being, "pending further evaluation of incoming information at future meetings''.

But the eventual outcome was still not in question, provided things go as the RBA expects.

"At the previous meeting, members had agreed that if the economy continued to evolve as in the latest forecasts, the Bank would in due course need to adopted a less expansionary policy stance,'' the minutes said.

"The information at this meeting suggested that economic conditions were indeed evolving broadly in that way.''

The factors staying the RBA's hand were clear, however.

The minutes revealed the RBA believed the global economy was improving, but that ``an important question'' was whether the improvement would be sustained or whether it was mostly the temporary effect of fiscal and monetary stimulus that governments and central banks had applied.

The RBA board was also concerned the banks, corporates and households around the world ``still faced significant balance sheet adjustments''.

"This too could serve to limit growth,'' the minutes said.

It also noted the supply of credit to businesses was still weak, as banks tightened lending conditions and expectations of higher short term interest rates fed into higher borrowing costs.

There were positives, too.

The flow of data on the local economy had been mostly positive, while there was signs the decline in business borrowing was slowing.

Business investment on equipment had picked up in the June quarter, although that may have been mostly due to temporary tax breaks bringing spending forward, the minutes said.

The weaker labour market was exerting downward pressure on wages growth and would help bring underlying inflation down from its "relatively high'' rate, and would help to reduce job losses.

So, in short, the RBA is expecting to raise interest rates at some point, but with many doubts about the sustainability of the global and domestic recovery, and easing pressure on inflation, it has the luxury of taking its time to ensure it doesn't jump the gun and kill the recovery before it has had a chance to take root.

AAP

Source: www.watoday.com.au