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Needle Still Points North

MNI (London)
By Lachlan Colquhoun
     SYDNEY (MNI) - The Reserve Bank of Australia kept interest rates unchanged
at 0.75% despite seeing a case for a further cut, concerned that further cuts
could undermine confidence in the economy, the minutes from the November meeting
show.
     There was agreement a case "could be made to ease monetary policy at this
meeting", but the board recognized the "negative effect" a further cut would
have on savers and sentiment, deciding to stand pat and "make another full
assessment once more evidence of the effects of the earlier monetary easing had
become available."
     The possibility that a further reduction in interest rates could have a
different effect on confidence than in the past, when interest rates were at
higher levels, was a concern, the Minutes said.
     The RBA has cut rates three times this year, by 25 basis points on each
occasion to the current record low 0.75% and the bank expects them to remain low
for some time to come, the minutes show.
     --TRANSMISSION IMPACTS
     Lower interest rates were supporting the economy through the "usual
transmission channels" of a lower exchange rate, higher asset prices and cash
flows for borrowers, but the RBA is also concerned at the impact on savers, many
of them retirees who rely on term deposits to maintain their lifestyles.
     Commercial banks had lowered interest rates on at-call retail deposits by
60 to 70 basis points this year, and the best rate of interest on savings was at
just above 1%.
     The minutes repeated the RBA's recent view that the economy had arrived at
a "gentle turning point", but noted it admitted "only gradual progress" towards
inflation and employment targets.
     Key to any recovery was wage growth, and the RBA said any lift in wages
"would be a welcome development."
     The RBA said it was expecting growth of 2.25% this year, increasing to 3%
by 2021, with unemployment, currently at 5.3%, expected to fall to below 5% by
2021. Headline inflation was running at 1.7% in Q3 against the RBA target range
of between 2% and 3%.
     The Bank has renewed its focus on full employment as a goal outcome, and
although it has declined to name a target it is understood to be just above
4.5%, or the level at which wages will start to increase and fuel inflation.
     --GLOBAL RISKS
     While the global outlook was "reasonable", the RBA concluded risks were
still tilted to the downside and while other central banks also remained
accommodative, "expectations for additional easing had declined over the prior
month (October)."
     There had been, however, a "decline in pessimism" in global financial
markets which could lead to better than expected outcomes, the minutes said.
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
[TOPICS: MMLRB$,M$A$$$,M$L$$$,MT$$$$]
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com