Australia central bank wary of cutting rates too quickly, prudent to await more data

Audio By Carbonatix

Enlarge

SYDNEY, July 22 (Reuters) – Australia’s central bank judged lowering interest rates for a third time within four meetings was not consistent with its strategy of easing in a cautious and gradual manner, a reason that it shocked markets by holding steady this month.

Minutes of its July 7-8 policy meeting showed the majority of the Reserve Bank of Australia’s nine-member board judged rates at 3.85% were still modestly restrictive, but it was difficult to know how far they could be cut before becoming neutral.

“So members observed that it might be prudent to lower interest rates cautiously as the required degree of policy restrictiveness declines,” the minutes showed.

The three members that argued for a rate cut judged there was already sufficient evidence that inflation was on track to be sustainably back to target, and there was less need to wait before eaing policy further.

The RBA surprised markets by holding interest rates steady at the meeting in a rare split of six to three, saying the majority of the board wanted to wait for more information including quarterly price data to confirm inflation was slowing.

Traders had wagered heavily on a cut after a monthly inflation report had shown the closely-watched trimmed mean measure hitting a 3-1/2 year low of 2.4% in May. The economy also barely grew in the first quarter as public demand sputtered.

In a nod to market pricing, the RBA said there had been instances in the past where markets had been very confident about the outcome of a policy meeting, but the central bank had acted a different other way.

The RBA said several data indicators had been in line with or even slightly stronger than forecasts, pointing to the benefit of waiting for a little longer.

It noted that even though economic growth was muted in the first quarter, a pick up in private demand was stronger than expected and the labour market had not eased as expected.

It noted monthly inflation could be volatile, and components like housing suggest June quarter inflation could be slightly stronger than expected.

On top of those reasons, the probability of the gloabl economy evolving in line with the most severe downside secario had declined, although the future state of U.S. trade and other policies was unpredictable.

Markets now imply around a 91% chance the RBA will ease again at its next meeting on August 12, after a surprisingly soft jobs report raised concerns that the resilient labour market was finally showing some cracks.

Futures see rates bottoming around 3.10% by early next year.

(Reporting by Stella Qiu; editing by Wayne Cole)

(([email protected]; +61 0 427901124;))

Keywords: AUSTRALIA RBA/MINUTES