RBA leaves way open for more rate cuts

The minutes of the latest monetary policy meeting in Australia did not explicitly flag the possibility of another round of interest rate cuts but left the way open.

The Reserve Bank of Australia (RBA) board meeting on May 1 ended with a cut in the cash rate to 3.75 per cent from 4.25 per cent.

The minutes spelled out the reasoning behind the move - economic growth and inflation that fell short of the central bank's expectations, the lowered forecasts for both published in the RBA's quarterly report on May 4, and the ongoing risks from Europe.

The minutes show no real sign that the RBA expects those factors to go away all of a sudden.

The forecasts prepared by the RBA, like those in the federal budget last week, are based on the assumption that market expectations for the cash rate are vindicated.

As the minutes noted, those expectations were - when the meeting was held - that cash would fall to 3.25 per cent by the end of this year. And the forecasts are consistent with plenty of scope to cut the cash rate.

"The staff assessment was that inflation was likely to remain in the lower half of the [2 to 3 per cent] target range over the foreseeable future, with cost pressures to be contained given the forecast for moderate growth in the economy," the RBA minutes said.

The RBA said the risks from Europe continued to cloud the world economic outlook and were weighing on market sentiment. "Members noted that the deterioration had not been triggered by any particular event but, rather, it reflected renewed concerns about the interrelated state of public finances and weakness in economic activity in the euro area."

In other words, the darker mood was soundly based on fears that fiscal consolidation would retard growth, making it harder for the affected countries to balance their budgets.

In the minutes, the RBA described this as a "negative feedback loop".

Against this backdrop, it's clear the RBA has not closed the door on further cuts to the cash rate.

However, the minutes did not canvass the possibility explicitly.

The RBA will be inclined to adopt a wait-and-see approach.

- AAP