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Australia's RBA Felt Rates High Enough in June

Australia's central bank concluded that interest rates were high enough to cool the economy and restrain inflation, at its June policy meeting, minutes showed on Tuesday, though the board stood ready to tighten further should demand not slow as expected.

The Reserve Bank of Australia's (RBA) policy-making board again considered whether financial conditions were tight enough to restrain demand, though this time the minutes made no mention of considerable time being spent discussing a hike as they did at the May meeting.

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Instead, the board noted that "the bulk of indicators becoming available over the past month continued to suggest moderation in the growth of domestic demand."

Retail sales had been flat over the first four months of the year and the RBA's liaison with retailers suggested sales had remained sluggish in May. The outlook for the housing market was also relatively weak.

"On balance, the board's assessment continued to be that, on current policy settings, the necessary moderation in demand growth was likely to occur," the minutes showed.

The central bank left its key cash rate unchanged at a 12-year peak of 7.25 percent at its June meeting, having lifted it twice earlier in the year as it fought to restrain core inflation at a 17-year high.

Still, the RBA again emphasized that the outlook for the economy was uncertain as there were strongly opposing forces at work. While financial conditions were tight, huge price increases for some of Australia's major commodity exports would deliver a big windfall to incomes in the country this year.

There was also a high degree of uncertainty about the global economic outlook and particularly the extent of the slowdown in developed nations.

"They concluded that it was therefore appropriate to maintain the current setting of monetary policy for the time being," the minutes showed. "However, should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage- and price-setting behavior, the outlook, and the stance of policy, would need to be reviewed."

The board noted that record petrol prices would likely lead to a jump of around 6 percent in the fuel component of the consumer price index in each of the second and third quarters. This would add about a quarter of a percentage point to CPI in each quarter, the minutes showed.

On the other hand, the board "took careful note that, despite the sustained strength of the labor market, aggregate wages growth had remained contained."

While job growth had remained strong up to April, the RBA expected some moderation to appear soon. Indeed, labor figures for May released after the June board meeting showed the first drop in employment for 19 months.

The board also noted that fiscal policy was likely to "impart a mild contractionary effect on the economy in 2008", given that the government was running bigger budget surpluses than first assumed.

Australian shares swung back into the black after spending most of the morning session in negative territory. Rate-sensitive banking shares such as National Australia Bank and ANZ shook off initial losses to climb higher after the RBA's minutes were released.