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RBA minutes show central bank debated holding rates at 2%

Australia's central bank members discussed leaving interest rates on hold at the May 3 meeting but decided on balance that a cut then would help return inflation to target over time.

In minutes of the policy review, where the Reserve Bank of Australia (RBA) reduced the cash rate by a quarter point to a record low 1.75 percent, the central bank said lower-than-expected inflation had been the main concern.

"Although the March quarter outcome for the CPI reflected some temporary factors, the broad-based softness in prices and labor costs signaled less momentum in domestic inflationary pressures than had previously been expected," the minutes said.

The RBA noted there had been no material change in its outlook for growth and was still of the view that the economy was continuing to rebalance away from the mining sector, thanks to "very accommodative" monetary policy and a lower exchange rate since 2013.

"Members discussed the merits of adjusting policy at this meeting or awaiting further information before acting," the minutes said.

"On balance, members were persuaded that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting."

The minutes gave little away on whether the RBA would cut rates again.

A few days after the rate decision, the RBA published its quarterly policy report which revealed the central bank had slashed its 2016 underlying inflation forecasts to below its target band of 2 to 3 percent.

It saw inflation drifting back to the bottom of its target band from 2017 through mid-2018, a material downgrade that prompted investors to bet on at least one more cut in interest rates this year.

Interbank futures are fully priced for a quarter point easing by October and have a one-in-three chance for yet another cut by year-end.

Economists from some of the major banks have also subsequently revised their interest rate outlook.

Commonwealth Bank last week said it now expected the cash rate to fall as far as 1.25 percent by November, warning the rate cuts could come sooner.

Expectations of more rate cuts combined with the threat of deflation and a fall in global bond yields have driven local yields to historic lows.

Australia's two-year government bond yields this week fell to a fresh troughs of 1.54 percent and 2.21 percent respectively.

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