Australia's central bank said it would start to raise interest rates if the local economy continues to recover as forecast, and that further rate cuts were unlikely given the economy had performed better than expected.
However, the Reserve Bank of Australia (RBA) said it was not clear whether the resilience in the economy was due to temporary fiscal stimulus and low rates. As such, the timing of the first rate hike would depend on the balance the risks of having a loose policy for too long against the danger of choking off any recovery.
"A particular source of uncertainty was whether the recent growth in household spending was due mainly to fiscal measures, in which case it would probably soon fade, a more general decline in risk aversion, or the more persistent effects of lower interest rates," the RBA said in the minutes for its last policy meeting in August.
The RBA left rates unchanged at a record low of 3 per cent in August, although markets are pricing in a rate hike as soon as November after the RBA's recent hawkish comments on rates. One year out, investors are betting interest rates will be at least 4.5 per cent, effectively typical six rate rises higher, according to Credit Suisse.
RBA Governor Glenn Stevens said last week that rates were currently at an "emergency" setting, and that a normal rate setting would be "a good deal north" of 3 per cent.
The central bank said China's strong economic recovery had provided a greater-than-expected boost to local exports, adding that there was reason to believe high levels of investment in China would continue for some time yet.
Local demand had also been stronger than expected and, while it remained to be seen whether the strength was temporary, the outlook for spending had improved nonetheless.
As such, the RBA said inflation will not fall as low as previously thought, and that underlying inflation was now forecast to fall to around 2 per cent by late 2010 and early 2011.
"If the economy evolved as anticipated in the forecasts, the Bank would in due course need to adopt a less expansionary policy stance," the RBA said.
"In recent months, members had left open the possibility of further reductions in the cash rate should further downside risks to the economy emerge. It now appeared unlikely this would be necessary."
Reuters
