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RBA home loan interest rates on hold for now…

The RBA appear comfortable with interest rates at 4.5% and maintains a neutral stance.  However, the risks to both the global and domestic outlooks appear to have shifted further to the downside.

In particular, the RBA appears more concerned about the outlook for Europe and ongoing tensions in global financial markets.  While the Bank notes that while the European data flow had held up surprisingly well and confidence and business conditions remain resilient, the downside risks emanating from fiscal and banking sector issues warrant a close watch.  The Bank is keenly awaiting the results of the European bank stress tests later this week as an important dictator of direction for financial markets and global confidence.  The minutes note that “in order to settle markets, it was critical that the stress tests be regarded as credible.”

The RBA notes that labour market conditions in the US remain soft and employment growth has been disappointing.  It is also cognisant of the moderation in growth in the Asia region, particularly China, although it acknowledges this as a positive development with growth “returning to a more sustainable pace after the very strong bounce-back” in late 2009 and early 2010.  However, what is important for Australia is “the extent to which economies in Asia could continue to grow strongly in the face of what could be an extended period of subdued conditions in the major North Atlantic economies.” The RBA sees growth in Australia’s major trading partners to be around trend over the coming years.

While recent domestic economic growth remains solid, the RBA is cautious around the (at present) tentative signs of a handover from the public to private-sector drivers of growth, and that it needs “careful monitoring.” This is a new, more circumspect, perspective from the RBA.  This wariness precedes the recent strength in local high-frequency indicators.  But the minutes suggest this strength may not have been a big surprise (and thus game-changer) for the Bank.  Most notably, the minutes note a solid outlook for employment suggesting June’s big jobs read would not have been beyond the realm of the Bank’s expectations.

Source ANZ Economics