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RBA Says Monetary Policy Is Cooling Demand

Reuters
Monday, 14 Jul 2008 | 10:04 PM ET

Australia's central bank was growing more confident that interest rates were high enough to retrain future inflation when it left rates unchanged at a 12-year high earlier this month, minutes of its July meeting showed on Tuesday.

The Reserve Bank of Australia's (RBA) policy board remained concerned that inflation in the second quarter would show another significant rise of over 1 percent which could feed through to higher price and wage expectations.

However, the board concluded that current policy was tight enough to cool demand in the long run.

"Members concurred that the evidence becoming available in the latest month had added weight to the view that the current stance of policy, in conjunction with the more general tightening in financial conditions that had occurred since the middle of last year and most recently the additional rise in fuel costs, were working to restrain demand," the minutes showed.

The board, which left its key cash rate at 7.25 percent at its July 1 meeting, noted consumer spending had slowed significantly and there had been a marked decline in credit growth.

It also said demand in the red-hot labor market was showing early signs of moderating, implying it was probably on hold in the coming months. Financial conditions have tightened since the RBA's last meeting with almost all the large commercial banks lifting mortgage rates, inflicting further pain on consumers struggling to balance budgets amid record petrol prices. Consumer sentiment is at a 16-year low and retail sales have been sluggish so far this year.

However, board members noted that the huge price rise in some of Australia's major commodity exports would boost national income substantially in the coming year, which could revive consumer spending.

"This meant that there remained considerable uncertainty about the outlook for demand and inflation," the minutes showed.

Strong demand for the country's exports from Asia is expected to boost the terms of trade by 20 percent this year, delivering a windfall for the economy and keeping alive price pressures.

Inflation figures for the second quarter are due on July 23 and are expected to show annual core inflation accelerated to a fresh 17-year high of 4.3 percent.

"Weighing up the various factors, the board judged that the current stance of monetary policy remained appropriate and would continue to evaluate prospects for economic activity and inflation in the light of new information," the minutes showed.

The board also discussed the impact of a major disruption at the Apache gas plant on the resource-rich Western Australian economy. The RBA estimated that the effect on the Australian economy as a whole would be to subtract about a quarter of a percentage point from economic growth.