Two-speed economy and housing slowdown prompted RBA to keep rates on hold

Australia’s two-speed economy and the softer housing market are listed among the reasons for keeping interest rates on hold in June, according to the minutes of the June 7 RBA board’s monetary policy meeting.

“While there had been additional evidence of the coming strong pick-up in investment in the resources sector, activity remained quite subdued in some other important parts of the economy, partly reflecting the Board's earlier actions as well as the appreciation of the exchange rate,” the minutes say.

However, although the flow of data over the past month did not add urgency to a change in policy, board members agreed that “further tightening in monetary policy would be necessary at some point”.

Moderate credit growth activity, softening asset prices and slowing employment growth all contributed to the decision for keeping the cash rate at 4.75%.

Weaknesses in the housing market are highlighted, including reduction in average dwelling prices so far in 2011, a slow-down in housing credit growth and falls in loan approvals over the first three months of the year,

In making its decision, the board also took into account softer global activity and the increased prominence of “downside risks to the international economy” over May 2011.

These include weakening global equity markets on the back of debt problems in Greece and renewed concerns about the Euro zone, increased volatility in foreign exchange markets and expectations of other major economies holding back on tightening monetary policy.

As a consequence, “members judged that it would be prudent to leave the stance of policy unchanged, pending further data on international developments and on the strength of domestic demand and inflationary pressures. They therefore considered that the current monetary policy setting was appropriate”.

“While inflation was currently in the bottom half of the target range in underlying terms, this had been partly due to the disinflationary effects of the appreciation of the exchange rate and the earlier moderation in labour costs. If the economy evolved in line with the staff forecasts, GDP growth would be somewhat above trend over the next few years, led by growth in the resources sector. A gradual pick-up in inflation could be expected under this scenario,” the minutes read.