RBA Defends Rate Cut, Says Growth Still Sub-Par

Greg Wood | AFP | Getty Images

Australia's central bank felt it needed to cut interest rates at its May meeting because the economy was still growing at a below-potential pace and inflation was not a threat.

Yet minutes of the Reserve Bank of Australia's (RBA) May 7 meeting revealed that board members were keenly aware that past rate cuts are still working through the economy.

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"Taking all the factors into consideration, the Board decided that some of the scope to ease policy should be used at this meeting," the minutes said.

"It judged that a further reduction in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target."

The RBA cut its cash rate by a quarter point to a record low 2.75 percent.

Markets are giving a less than one-in-five chance of a follow-up move in June, but are fully priced for a quarter-point easing over the next 12 months.

(Read More: Was Australia's Central Bank Right to Cut Rates?)

Board members saw that households were responding to low rates with the housing market picking up and consumer confidence above average.

But they noted that investment outside the resources sector was still subdued and business conditions remained below average, possibly in part due to the high local dollar.

The RBA expects the economy to grow a little below trend this year, and only picking up gradually to be close to trend through 2014.

"The near term forecast reflected the slowing in overall business investment, given the peak in the mining investment boom along with the effects of fiscal consolidation and the high level of the exchange rate," the minutes said.

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"This was expected to be partly offset by growth of resources exports, a pick-up in consumption and moderate growth in dwelling investment."

Since the rate cut, the Australian dollar has dropped more than 4 percent versus its U.S. peer, although the fall partly reflected a resurgent greenback.

Just this week, the Aussie hit an 11-month trough near $0.9700, a development likely to be welcomed by some exporters.