Australian interest rates will be on hold for a while longer as the central bank confirms that it will ignore short term blips and troughs in inflation and other data caused by the floods and bad weather.
In the minutes of the March 1 board meeting, released yesterday the RBA said.
"Members confirmed that the Board’s approach would be to look through temporary effects caused by extreme weather events and to continue to set monetary policy based on the medium-term outlook for growth and inflation.
"Overall, the economy appeared to be growing at close to its trend rate and the outlook for inflation over the year ahead was consistent with the target."
In both the above statements the bank is saying that it won’t be stampeded by the expected rise in March and June quarter inflation (by around 0.5% to an annual rate of 3%) as some analysts had been trying to suggest in January when the floods were at their peak.
In fact the inflationary boost from higher food prices has been nowhere as dramatic as the alarmists had suggested.
And with the bank say that the "economy appeared to be growing close to its trend rate" supports the belief that rates will not be changing any time soon, especially as the minutes said the outlook for inflation over the year ahead was consistent with the bank’s two to three per cent medium-term target.
"Interest rates on loans were slightly above average, a level reached after the monetary policy decision taken in November 2010. Members judged that this mildly restrictive stance of policy continued to be appropriate," the minutes said in confirming that the cash rate would be left steady at 4.75%.
Overall the economy appeared to be growing at close to trend rate and the outlook for inflation over the year ahead was consistent with the bank’s two to three per cent medium-term target, the RBA said in the minutes, released today.
But the cut in coal mining output in Queensland was likely to see economic growth cut by a larger amount than the RBA had forecasted last month, the minutes said.
"Coal shipments from Queensland ports had declined sharply in January, consistent with the staff’s earlier expectations.
"The staff continued to expect that the floods could take around half a percentage point of growth in each of the December and March quarters, though ongoing problems in de-watering coal mines meant that the downside risk for the March quarter appeared larger than at the time of the February meeting."
Cyclone Yasi would also add to the consumer price index, a key measure of inflation, but the effects were likely to be reversed later in the year.
And while households and business did not appear to be under financial stress, both were still showing more caution in their borrowing behaviour.
"Members saw this as a welcome development, particularly as household debt remained at a historically high level and debt servicing requirements had recently increased with the rise in interest rates," the minutes said.
Earlier, RBA Assistant Governor, (Financial Markets), Guy Debelle told a Sydney conference that the new bank liquidity standards from regulators will not affect demand for securities.
He said the amount of bonds issued by the Australian Government (CGS) and state borrowing authorities (semis) fell well short of the amount of liquid assets banks will need to meet liquidity standards laid out in the Basel II agreement.
But Mr Debelle said it would be counter-productive to require banks to hold such a large share of assets, which would impair liquidity in these markets.
"Hence… the RBA will offer the banks a committed liquidity facility to meet the shortfall," he said.
"The eligible assets that banks will need to hold to access this facility are those which are currently eligible for repo with the RBA in its normal operations.
"While a fee will be charged for this facility, I don’t see that affecting the relative demand for securities, other than CGS and semis."
