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Reserve Bank of Australia board members felt the Australian economy and the global economy were improving, but the recovery was not sufficiently entrenched to begin raising interest rates, minutes from the September 1 monetary policy meeting revealed on Tuesday. RBA governor Glenn Stevens and the board had left interest rates unchanged at 3.00% following the September 1 policy meeting.
The members noted that the prospects for the Australian economy were looking bright, citing rising consumer and business confidence, increasing public investments, and rising exports. Moreover, the minutes said that the deterioration in the numbers employed in the country was "less than feared". A sharp increase in spending on a wide range of capital goods was witnessed in the June quarter, although this was attributed to bringing forward of spending to qualify for tax allowances.
On the global level, the minutes showed a wide range of economic data "indicated a continued consolidation in the global economy", most notably in Asia. The members noted that strong growth in the Asian economy was good news for Australia, with Australia's largest export destinations now in Asia. However, the question remained regarding the sustainability of the recovery, with doubts in particular on whether the growth was a one-off effect of stimulus measures, or if there was genuine fundamental improvement in global economic conditions.
Members also took note of rising sentiment in financial markets, with credit spreads gradually returning to normalcy, along with the strengthening of the equity markets. With regards to bank funding, a continuation of the strong competition for deposits was witnessed, and together with an increase in term interest rates, led to an increase in bank funding costs.
The members observed that the Australian financial system continued to perform strongly, with the Australian banks reporting solid profits for the last half year. Also, the members noted that the "extreme risk aversion" prevailing in global markets in the wake of the Lehman Brothers collapse last year had dissipated, and that investors had become more confident, as reflected by rising global equity prices.
"An important question for members was whether the global economic improvement would be sustained, or whether it was mainly a reflection of the strong macroeconomic stimulus that had been applied over the past year and might in due course fade", the minutes said. "Members concluded on balance that the global economy was most likely on a sustained, if modest, recovery path, though it was still too soon to be confident of this assessment".
Members were reassured by signs of wage moderation in the economy, as this would help contain inflation in the near term. Nevertheless, with underlying inflation still high and economic activity stronger than expected, the need to balance the task of controlling inflation, and at the same time support the economic recovery, was highlighted.
"As at the previous meeting, members noted that the policy decision in the near term involved balancing the risk of over-staying an accommodative stance, and that of prematurely tightening and adversely affecting confidence and demand", the minutes said, before commenting that "the balance was best struck" by leaving the interest rate unchanged for the time being.
The Australian dollar that showed strength against its major rivals in early Asian trading on Tuesday pared some of its gains shortly after the release of RBA's September policy meeting minutes. The aussie thus dropped from a 4-day high against the U.S. dollar and Japanese yen.
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