RBA minutes reveal confidence in economy

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RBA minutes reveal confidence in economy

Australia's central bank kept borrowing costs unchanged this month as domestic job growth and previous interest-rate reductions help the local economy weather global disruptions, minutes of its July 3 policy meeting showed.

The dollar jumped almost half a US cent to about $US1.03 on the RBA news as investors pared expectations of another interest rate cut soon.

RBA sees bright prospects for the economy.

RBA sees bright prospects for the economy.Credit: Peter Braig

“Consumption was being supported by a favorable labor market and recent liaison had a firmer tone,” according to minutes released today explaining why the overnight cash-rate target was left at 3.5 per cent.

“With recent signs that the domestic economy had a little more momentum than had earlier been indicated, members saw no need for any further adjustment to the cash rate at this meeting.”

RBC Capital Market economist Michael Turner said the minutes stick to an upbeat theme from the central bank.

“The minutes are constituent with what they’ve been saying over the past month with trend growth and inflation around target, rates are probably where they need to be,” Mr Turner said.

Australia grew at the fastest annual pace in the developed world in the first quarter of 2012, and government reports since RBA Governor Glenn Stevens's latest policy decision have painted a mixed picture of the economy. Retail sales rose by more than twice the pace economists forecast and consumer confidence strengthened, while the unemployment rate increased in June and home-loan approvals sank.

Growth “probably slowed a little from that reported for the first quarter to be around trend pace,” policy makers said in the minutes. “Mining investment had been a little stronger than had been expected, and members noted that growth in much of the non-resource economy had remained modest.”

In their debate, the RBA officials indicated concern that the recovery in the US had slowed and European activity declined, while data for May suggested China's economy wasn't slowing as much as previously anticipated.

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China's prospects

“Developments had been more positive for the Chinese economy following some weaker data released the previous month,” the minutes said. “Members noted that the situation in Europe could deteriorate again and spill-over to other economies remained a substantial risk.”

Traders are pricing in a 76 per cent chance that policy makers will resume rate cuts next month and lower borrowing costs by a quarter per centage point to 3.25 per cent, Bloomberg data based on swaps trading shows.

Two days after Stevens paused, China's central bank announced the second rate cut in a month and has reduced banks' reserve requirement ratio three times starting in November. China's gross domestic product increased 7.6 per cent in the second quarter from a year earlier, the slowest pace in more than three years, the government reported July 13.

Powering the Australian economy is the biggest resource boom since prospectors set off a gold rush in the 1850s. The latest bonanza - for iron ore, coal and natural gas -- is bringing investment projects the government estimates to be worth $500 billion.

The nation's unemployment rate, at 5.2 per cent last month, is lower than 8.2 per cent in the U.S. and 11.1 per cent in the euro area.

Business credit

“Forward-looking indicators and liaison implied modest employment growth over coming months,” RBA policy makers said in the minutes. Business credit, after a long period of weakness, “had picked up noticeably over the past four months” and officials saw no dislocation in domestic financial markets, the minutes said.

The resource expansion has fueled a 45 per cent gain in the local currency since the start of 2009 against the U.S. dollar, which has hurt businesses and workers in the tourism, education and manufacturing industries, while lowering import prices.

“The Australian dollar appreciated over the month, bolstered by positive economic data and further buying of Australian government debt by offshore investors,” the minutes showed. Inflation pressures remained contained, in part reflecting “the still high level of the exchange rate and a softening in global prices, in particular for oil and other commodities,” they said.

Mining boom

Mining companies including BHP Billiton and Rio Tinto are benefiting from surging demand for steel and electricity in emerging economies including China and India.

Australia's gross domestic product expanded 4.3 per cent in the first quarter this year from a year earlier. Consumer confidence rose to a five-month high as households responded to 1.25 percentage points of RBA rate cuts since November.

The RBA has reduced the overnight cash rate target four times in the past eight months - by 25 basis points at successive meetings in November and December, by 50 points on May 1 and by another 25 points on June 5.

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Policy makers noted that after the June decision, most lenders reduced their standard variable housing rate by about 20 basis points. “As a result, the average interest rate on outstanding housing loans was about 60 basis points below the post-1996 average,” they said.

Bloomberg with Chris Zappone, BusinessDay

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