Tuesday, August 20, 2013

Reserve Bank leaves door open to more rate cuts - but reluctant to say another is imminent

By Business editor Peter Ryan

The Reserve Bank has signalled that the official interest rate could remain on hold at a historic low unless there is a major deterioration in Australia's economic outlook.

In the minutes from the decision a fortnight ago to cut the cash rate to a 2.5 per cent, the RBA board appears to have settled on a neutral monetary policy stance with a bias to ease as required.

"Members agreed that the Bank should neither close off the possibility of reducing rates further, nor signal an imminent intention to reduce rates further," the minutes say.

The minutes from the RBA's August decision effectively rule out a pre-election rate cut when the Board next meets on September 3.

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"The Board would continue to examine the data over the months to judge whether monetary policy was appropriately configured," according to the minutes.

The RBA's decision to sit on the fence follows a raft of soft economic data with GDP expected to slow to 2.25 per cent and the jobless rate tipped to peak at 6.25 per cent.

However, the RBA says the further decline of the Australian dollar will be "important" in deciding the course of monetary policy.

The dollar "had declined since the previous meeting though remained high by historical standards" the minutes say.

The minutes add that further declines in the exchange rate would assist in rebalancing growth in the economy.

The minutes appear to signal that further rate cuts would require a material worsening of the economic outlook beyond the outlook in the RBA's recent Quarterly Statement on Monetary Policy.

Since the August meeting, Treasury release its Pre-Election Economic and Fiscal Outlook (PEFO) which confirms the outlook for slower economic growth, and rising unemployment.

The minutes shed little new light on the decline of the mining investment boom other than to confirm that business spending would be affected by a "turning of the cycle".

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