Australia’s central bank said acute uncertainty created by the turmoil in global financial markets could spill over to business and consumer confidence at home, the main reason it decided not to raise interest rates earlier this month.But it also noted that underlying inflation was picking up and likely to rise above its target band of 2-3 per cent in the medium term, minutes of the Reserve Bank of Australia’s (RBA) August 2 policy-setting meeting showed on Tuesday.The RBA, which has been the most aggressive in the developed world by hiking 175 basis points since late 2009, had kept the cash rate unchanged at 4.75 per cent for a 9th straight month.
“Members considered whether the recent information warranted further policy tightening,” the minutes said.“Members believed there were grounds for concern about the medium-term outlook for inflation, given the relatively limited spare capacity in the economy, the widespread increase in cost pressures, including in imported goods and the relatively low rate of productivity improvement.”But the RBA saw mounting downside risks to demand due to global financial market turmoil which, if it persisted, could dampen inflation over time.
The minutes said policymakers discussed risks stemming from the fiscal problems in the United States and Europe.“It was possible that these could play out in a disruptive manner, leading to a marked risk in global risk aversion, as had occurred in 2008,” it said.Back then, the RBA moved swiftly to slash rates by a total of 425 basis points as it tackled the 2008/2009 global financial crisis. Markets have rushed to price in a return of such a scenario, with interbank futures discounting up to 119 basis points worth of cuts by March 2012.The Australian dollar also suffered an eye-watering drop to below parity with the greenback last week, only to bounce back to around $1.0500 amid the extreme swings in markets.
For now, with very subdued credit growth, a strong Australian dollar, softer asset prices and interest rates a little above average, the RBA concluded that financial conditions were already “exerting a reasonable degree of restraint” on the economy.
From / Gulf Today