Central bank cites subdued spending for rate pause

File photo / Dean Purcell

Australia's central bank left interest rates unchanged this month as consumer restraint slows inflation and offsets stronger demand for the nation's resources, minutes of its February 1 policy meeting show.

"The continuation of subdued growth in consumer spending and the lower-than-expected inflation outcomes provided additional time for the board to assess at future meetings the evolving balance of risks to both output and inflation," the minutes released yesterday in Sydney said.

The minutes reflect growing attention by Reserve Bank of Australia members to consumers who are holding back purchases and saving more after seven interest rate increases from October 2009 to November last year.

Households that the RBA characterised as "highly value-conscious" are easing price pressure fuelled by a mining investment boom and a labour market near full employment.

The RBA minutes said "the evident caution in household spending would, if it persisted, reduce the pressure on prices that might normally be expected in an economy with very strong terms of trade and limited spare capacity".

RBA Governor Glenn Stevens held the benchmark rate at 4.75 per cent for a second straight meeting after a quarter percentage-point rise in November. In testimony to a parliamentary panel last week, he said natural disasters in the past two months in the nation's northeast won't derail the expansion.

"Given the medium-term outlook for the economy, and the limited amount of spare capacity that existed, members judged that this slightly restrictive policy stance remained appropriate," according to the minutes.

On February 4, the RBA said the economy will expand more than previously forecast this year as flood rebuilding accelerates in the second half, tightening the labour market and pressuring wages.

The RBA raised its forecast for 2011 growth to 4.25 per cent, from a November prediction of 3.75 per cent, when measured from the fourth quarter of 2010 to the final three months of this year. Consumer prices will rise 3 per cent, from a previous estimate of 2.75 per cent, it said.

Inflation slowed to 2.7 per cent last quarter from a year earlier, within the RBA's target band of 2 per cent to 3 per cent.

The central bank said yesterday the past two readings of the consumer price index "suggested that the weakness in retail spending had led to a little more disinflation than had earlier been expected, with the year-ended underlying rate of inflation now clearly in the lower-half of the target range".

Stevens last week signalled little urgency about raising rates in the near term.

"We're ahead of the game, which is where you want to be, and that's the thing that affords you periods of sitting, waiting and watching," he told lawmakers in Canberra on February 11. "Sometimes, they can be reasonably lengthy periods."

Traders see a less than 50 per cent chance of Stevens raising rates by a quarter point before September, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange.

- BLOOMBERG