×

Australia's central bank aimed for stronger growth with Aug rate cut

A man and a women walk into the Reserve Bank of Australia headquarters in Sydney, Australia.
Mark Metcalfe | Getty Images
A man and a women walk into the Reserve Bank of Australia headquarters in Sydney, Australia.

Australia's central bank saw room for faster economic growth when it cut interest rates to record lows earlier this month, predicting inflation would still remain below target for another two years or more.

The Reserve Bank of Australia (RBA) cut its cash rate by a quarter point to 1.5 percent, the second easing this year, as it sought to defend the economy from creeping deflation and restrain a buoyant currency.

"Members noted that the recent CPI data had confirmed that inflation was likely to remain low for some time," minutes of the Aug. 2 meeting showed.

"They also noted that while prospects for growth were positive, there was room for stronger growth, which could be assisted by lower interest rates."

The central bank also had one eye on the Australian dollar which has stayed firmer than desired for much of this year, hampering the economy's shift away from mining-driven growth.

The Aussie dollar is up more than 5 percent so far this year.

While the minutes implied broad consensus among board members on lowering rates in August, but gave little away on whether the RBA would ease again later this year.

Financial markets are pricing in a 50-50 chance of another quarter point cut in official cash rates by Christmas.

Last week, RBA Governor Glenn Stevens highlighted limits to monetary easing and downplayed concerns the RBA might take excessive policy steps in order to try and increase inflation back to target "in short order."

He also favored retaining the current inflation target of 2-3 percent and warned against lowering it.

In its quarterly report published a few days after the rate decision, the RBA warned that core inflation was likely to remain below target for the next two years.

Adding to the case for the August easing was cooling in the red-hot housing market of Sydney and Melbourne.

"This suggested that the risks associated with rising household sector leverage and rapid gains in housing prices had diminished," the minutes showed.

"Taking all these considerations into account, the Board, on balance judged 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."

Follow CNBC International on Twitter and Facebook.