RTTNews - The minutes of the Reserve Bank of Australia's latest monetary policy meeting held on August 4 showed that the board members were of the view that the cash rate had been reduced to the current low level in anticipation of weak economic outcomes.
In its meeting, the board members held the cash rate at a 49-year low of 3%. At the same time, the board members left open the possibility of further reductions in the rate if need arose. But with the recent improvements in the global and domestic outlook, the members said it appeared unlikely that further cuts would be necessary.
In fact, if the economy evolved as anticipated in the forecasts, the Bank would in due course need to adopt a less expansionary policy stance, the minutes said.
Further, the members of the board said the timing and process of removing some of the current expansionary policy setting, when it began, would involve two risks. One of the risks was of overstaying a very accommodative setting in a recovering economy, particularly when underlying inflation still needed to decline to reach the target. The second was a risk of an early tightening choking off confidence and demand prematurely.
A particular source of uncertainty was whether the recent growth in household spending was due mainly to the temporary fiscal measures, in which case it would probably soon fade, a more general decline in risk aversion, or the more persistent effects of lower interest rates, the Board noted.
In the meantime, the members said a strong rebound in China and in some other Asian countries was supporting prices and volumes of the country's exports in a bigger way than had been expected earlier in the year. The outlook for the domestic economy improved, reflecting stronger domestic demand, as also an increase in household and business confidence.
Accordingly the central bank raised the forecast for 2009 to 0.5% growth from its earlier expectations of a 1% GDP decline. Also, the outlook for 2010 is stronger, with the central bank expecting 2.25% growth for the year.
The underlying inflation rate has fallen in recent months and the board anticipates further declines. The staff now expects the underlying inflation rate to fall to around 2% by late 2010 and early 2011.
Meanwhile, the members noted that financial markets had improved substantially and the global economic outlook was also better. The risks of a further large slump has diminished, although they had not disappeared, the Board added.
In a speech Monday, Australia's Secretary to the Treasury, Ken Henry said the need for fiscal stimulus would abate over time and the key drivers of economic growth would again be related to population, participation and productivity. Short term fiscal stimulus helps. But its palliative effect is necessarily temporary. This is why the stimulus measures and guarantees of banking system liabilities have exit strategies, Henry noted.
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