RBA in wait and see mode on rates

3.RBA in wait and see mode on rates

By Jason Cadden

Sydney

(Australian Associated Press)

The Reserve Bank appears content to keep its interest rate at a record low for the time being as Australia’s non-mining industries begin to show signs of improvement.

Minutes from the RBA’s September meeting, when the cash rate was kept on hold at 2.0 per cent, noted improvements in hiring intentions in the services sector and that non-mining business investment was expected to pick up.

“Members observed that recent indicators of consumer sentiment and retail sales had been consistent with some increase in consumption growth,” the RBA said.

“They also noted that conditions in the housing market overall had remained strong and that housing price inflation nationally had risen since the beginning of the year, notwithstanding regional disparities.”

The day after the RBA’s board meeting, June quarter GDP figures showed that economy grew at its weakest pace in two years.

However, the RBA had expected the result because of a fall in resource export volumes following production disruptions.

“GDP growth was expected to remain below average in year-ended terms, but members recognised that a number of indicators of domestic economic activity had shown some improvement over recent months,” the RBA said.

“Non-mining business investment was still expected to pick up over time as a result of the depreciation of the exchange rate over the past year and a further gradual rise in household expenditure.”

The minutes also noted that the weaker Australian dollar was getting to a level where it could give the economy a boost.

JP Morgan economist Stephen Walters said he believed it would take a lot for the RBA to cut its cash rate again.

“It likely would take more profound disappointments in markets or in conditions in Australia’s major trading partners, alongside domestic deterioration, including a higher jobless rate,” he said.

While the RBA board members appeared more optimistic about the domestic economy, they were unsure as to the ultimate impact of recent turmoil on financial markets sparked by worries about China’s slowing economy.

“Members noted that this presented a downside risk to the overall outlook for growth in China over the coming year, although they recognised that it was too early to assess accurately the effect of several recent policy changes designed to support activity,” the minutes said.

Board members also noted that the financial markets volatility had dampened expectations of the US Federal Reserve lifting its interest rate this week.

However the RBA believed that when the Fed does lift rates for the first time in nine years, it will have significant effects on financial markets.”

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