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Australia Central Bank Repeats Policy Right for Now

Australia's central bank on Friday repeated that interest rates were at the right level for the moment though there would be scope for an easing if the economy slowed materially.

Australian Notes - Mixed
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Australian Notes - Mixed

In its quarterly statement on policy, the Reserve Bank of Australia (RBA) said it was difficult to judge what the net effect on the economy would be of a once-in-a-century resources boom combined with a high real exchange rate.

RBA Governor Glenn Stevens also noted that while the high currency was helping restrain price for tradable goods, non-tradable inflation was running higher than desired.

The central bank surprised many this week by holding its main cash rate at 4.25 percent, when the market had looked for a cut to 4 percent. The bank had already eased by a quarter point in both November and December.

"The Board judged that it was appropriate, for the moment, to hold the cash rate steady at 4.25 percent, given that the central forecast was for close to trend growth in GDP and inflation being close to target," Stevens wrote in the 70-page report.

The bank kept most of its economic forecasts unchanged, but trimmed that for gross domestic product by half a point to 3.5 percent for the year to June. It also nudged down its forecast for underlying inflation to 2.25 percent by June.

Stevens said key to the forecasts for growth of 3 to 4 percent out to 2014 was booming investment in the mining sector, which was set to be the strongest in half a century.

"In terms of domestic factors, it remains difficult to judge the net impact on the economy of, on the one hand, a once-in-a-century investment boom in the resources sector and, on the other, a high real exchange rate," said Stevens.

Stevens said it was uncertain how these factors would play out with both plausible upside and downside scenarios for the economy.

He also pointed to higher cost pressure domestically for services, with non-tradable inflation running at 3.25 percent last year, above the bank's long-term target band of 2 to 3 percent.

"Some further moderation is likely to be required for overall inflation to be consistent with the mid-point of the target range once the effect of the appreciation of the exchange rate on tradable prices fades," said Stevens.

Stevens said employment growth was expected to remain fairly subdued in the near term with a further small increase in the jobless rate forecast over 2012, before it declined again.

Employment growth slowed to zero over 2011 though the jobless rate was still historically low at 5.2 percent.

Stevens said liaison with firms suggested some were delaying hiring awaiting more certainty on the economic outlook.

The debt situation in Europe remained the major risk to the outlook, though Stevens said the danger of a deep recession there seemed to have lessened recently.

Growth in China had moderated to a more sustainable pace, while the U.S. economy had improved in recent months.