RBA June Rate Cut Debate ‘Finely Balanced,’ Minutes Show

Reserve Bank of Australia Governor Glenn Stevens
Glenn Stevens, governor of the Reserve Bank of Australia. Photographer: Patrick Hamilton/Bloomberg

The Reserve Bank of Australia lowered interest rates this month after a “finely balanced” discussion that the domestic economy was holding up as global prospects worsened, minutes of its June 5 meeting showed.

“There was clear evidence suggesting a softening in global conditions, and uncertainty about the future in Europe had increased significantly,” minutes released today in Sydney showed two weeks after the overnight cash rate target was cut by 25 basis points to 3.5 percent. Thirteen of 27 economists surveyed by Bloomberg News predicted the move, four forecast a half-point reduction and 10 expected no change.

“With inflation expected to remain in the lower part of the targeting range over the next year or so, members considered that there was scope for monetary policy to be a little more supportive of domestic activity,” the minutes showed.

The 25-point cut combined with earlier moves would provide “a measure of stimulus” as global turmoil emanating from Europe threatened to weigh on consumer behavior, the minutes showed. Since RBA Governor Glenn Stevens’s decision, the Australian dollar gained about 4 percent as government reports showed stronger-than-forecast domestic hiring last month and annual growth in the first quarter was the best since 2007.

“Recent domestic data generally had not suggested a significant weakening in conditions compared with the forecasts a month earlier,” the minutes showed.

The Australian dollar was little changed at $1.0125 as of 11:32 a.m. from $1.0127 before the minutes were released.

Rates Outlook

Investors pared bets on a quarter percentage-point rate cut at the RBA’s next meeting July 3 to an 85 percent chance, down from a 92 percent probability earlier today, according to swaps market data compiled by Bloomberg.

Two days after Stevens eased this month, the central bank in China, Australia’s largest trading partner, reduced rates for the first time since 2008 as Europe’s turmoil threatened to disrupt the global economy.

In today’s minutes, the RBA said Europe’s crisis was occurring “in the context of ongoing weakness in economic activity” in that region. In the U.S., the outlook “remained clouded” by fiscal tightening expected next year, minutes showed, and China’s growth pace had slowed “a little further.”

Greek Crisis

Greece’s largest pro-bailout parties, New Democracy and Pasok, won enough seats in an election June 17 to forge a parliamentary majority, easing concern the country was headed toward an imminent exit from the euro.

Political leaders in Europe insist Greece enact spending cuts promised in return for 240 billion euros ($302 billion) in rescue packages since 2010 while holding out the possibility of granting extra time to meet targets for narrowing the budget deficit.

By contrast, Australia’s economic performance and fiscal situation offer “lessons for the world,” Prime Minister Julia Gillard said yesterday on the sidelines of a Group of 20 meeting in Mexico.

Her government in May forecast a A$1.54 billion ($1.56 billion) surplus for the year starting July 1, ending four years of deficits. Balancing the budget would give the RBA “maximum room” to lower rates if needed to boost growth, she said in an interview the day after her fiscal plan was released.

The RBA has cut the overnight cash rate target four times in the past eight months -- by 25 basis points at successive meetings in November and December, by 50 points on May 1 and by another 25 points this month.

Mining Boom

At 3.5 percent, the nation’s benchmark borrowing cost is still the highest among major developed economies. Policy rates are near zero in the U.S. and Japan, 0.5 percent in the U.K., 1 percent in the euro area and in Canada, and 2.5 percent in New Zealand.

Powering the Australian economy is the biggest resource boom since prospectors in New South Wales set off a gold rush in the 1850s. The latest bonanza -- for iron ore, coal and natural gas -- is bringing investment projects the government estimates to be worth about A$500 billion and helped keep the unemployment rate at 5.1 percent last month. That’s lower than 8.2 percent in the U.S. and 11 percent in the euro area.

Mining companies include BHP Billiton Ltd. and Rio Tinto Group are benefiting from surging demand for steel and electricity in emerging economies including China and India.

Australia’s gross domestic product expanded 4.3 percent in the first quarter from a year earlier, making it one of the fastest-growing developed economies. The number of people employed rose by 38,900 last month, capping the best January-May period in five years, government figures showed this month.

Currency’s Effect

Still, a local currency that’s advanced about 44 percent since the start of 2009 against the U.S. dollar has hurt businesses and workers in the tourism, education and manufacturing industries. Consumer confidence has stagnated in recent months as households remained concerned that Europe’s fiscal crisis will derail the global economy.

Reviewing the outlook for the domestic economy, the RBA saw “continued moderate growth,” with the unemployment rate expected to move “somewhat higher over the coming quarters,” according to the minutes. RBA members were briefed that a “very large pipeline” of mining remained set to boost capital investment, the minutes showed.