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RBA Says Rate Setting Right for Economic Outlook

Australia's central bank said risks from the euro zone debt crisis appeared to have diminished somewhat and domestic growth looked set to stay on trend, reasons that led it to keep interest rates unchanged this month.

Australian Notes - Mixed
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Australian Notes - Mixed

Minutes of the Feb. 7 policy meeting gave precious little in terms of new information on the Reserve Bank of Australia's (RBA) thinking. The central bank board members merely reiterated that a benign inflation outlook meant that it could cut rates if necessary.

"They judged that if demand conditions were to weaken materially, the inflation outlook would provide scope for a further easing in monetary policy," the minutes said.

It wasn't clear if policymakers had actually discussed cutting rates this month. In December, the minutes showed they had discussed not easing but in the end decided to cut by a quarter point, the second move in as many months.

The central bank surprised many this month by holding its main cash rate at 4.25 percent, when the market had looked for a cut to 4 percent.

Board members noted those cuts had been passed through to most other lending rates, which were now "around average levels", the minutes said.

In its quarterly statement on policy released earlier in the month, the RBA said it felt interest rates were at the right level for now.

The bank said it expected inflation to stay within its target band of 2 to 3 percent for the next couple of years and analysts had assumed this benign outlook meant the RBA had more room to take out insurance against global uncertainties caused by the debt crisis in Europe.

Board members also discussed the improved mood in global financial markets over December and January thanks to the European Central Bank's massive liquidity injection and better-than-expected economic conditions in the United States.

"While the financial situation in Europe remain fragile, the likelihood of an extremely bad outcome seemed to have diminished somewhat over the previous couple of months, partly reflecting actions by the European policymakers," the minutes said.

"This together with stronger economic data from the United States, had provided a mild boost to confidence in financial markets."

On China, the country's single biggest export market, the RBA said growth has slowed to more sustainable levels but was still quite robust. One uncertainty was whether a slowdown in the Chinese property market would have a broader impact.

Domestically, the RBA acknowledged there were significant differences in conditions across sectors, with a high Australian dollar causing some restructuring.

Still, it believed that overall demand growth would remain firm thanks largely to booming investment in the resources sector.

"With growth expected to be close to trend and inflation consistent with the target, the Board considered that this setting was appropriate for the overall economic outlook," the minutes said.