The Reserve Bank of Australia (RBA) believes interest rates are at the right level to balance out the effect of Australia’s surging resources sector against weaker industries like manufacturing and retail.
The RBA on Tuesday released the minutes to its March 6 board meeting at which it kept the cash rate unchanged at 4.25 per cent.
The cental bank has kept the cash rate unchanged at two consecutive monthly board meetings, after cutting it by 25 basis points in November and again, by the same amount, in December.
According to the minutes, the board noted that high terms of trade and Australian dollar were causing “significant structural adjustment” in the domestic economy.
The resources sector continued to boom, with investment in capital expenditure in 2012/13 expected to exceed already elevated levels, while other industries, including construction, retail and manufacturing, remained weak.
The overall effect, it said, was that the economy was growing “around trend” with inflation within the RBA’s target band of two to three per cent.
“In this regard, most information thus far had indicated that weakness in parts of the economy was being approximately balanced by the strength in the mining sector and some service industries,” the RBA said in the minutes.
It said the biggest risk to the economy was a significant worsening of financial conditions in Europe stemming from the continent’s sovereign debt crisis.
However the likelihood of a major economic downturn had diminished in recent months and, if one did occur, the RBA had scope to cut the cash rate to stimulate the economy.
HSBC chief economist Paul Bloxham said the RBA was trying to balance the conflicting forces within the economy.
“We know that there are two real forces working in opposite directions: weak productivity growth is an upside risk to inflation but, at the same time, the strong Aussie dollar and the structural change we are seeing is also slowing down growth, which can lower inflation,” he said.
“They are not certain which way this will play out but they seem comfortable where they are for the moment and, overall, they still see scope to cut interest rates if they need to.”
Westpac senior market strategist Damien McColough said the minutes indicated that the RBA believed its current policy settings were appropriate.
“Broadly speaking, the RBA is telling you that they’re comfortable with the interest rate setting at the moment and that they will continue to monitor the global and domestic economy,” he said.
