MNI POLICY: RBA Sees Cut Case, But Sentiment Worries - Minutes

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

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