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RBA Minutes Suggests More Cautious Policies, Australian Dollar Weakens

By David Liu
19 April 2011 02:12 GMT

Minutes highlights include:

RBA sees current interest rate policies as “appropriate”

First quarter GDP to be depressed more than expected from weather; headline inflation higher

Australian export prices to be high for a longer amount of time

Labor market outlook to remain “positive”

Improving commercial property prices and construction to be expected

Interest rates on home, business loans very little above average levels

Business investment to offset weaker housing, consumption levels

Global uncertainty increasing from Japanese earthquake, European debt

Today’s release of the Reserve Bank of Australia’s April 5th meeting minutes gave investors a better look on how the Australian economy was performing in the first quarter and what stance the central bank wanted to take in the near term. Overshadowing other parts of the minutes were RBA’s inflation outlook and possible slower growth.

The major topic today is the RBA’s stance on its interest rates as “appropriate,” signaling no further interest rate increase in the near term. The bank has retained its “hands-off’ approach for interest rates within the past two years, leaving the benchmark Cash Rate Target unchanged since November 2010 at 4.75% after a 25 basis point increase. Even with a forecast for higher inflation in the first quarter due to weather, past experience has shown that the RBA not raising rates, even with inflation predictions. With today’s cementing of its policy, along with concerns about Australian economic growth, interest rate hikes in the near future are expected to be unlikely.

Although faced with higher inflation, the RBA’s stance that there will be a possible slowdown in the Australian economy, largely due to the strength of the Australian dollar hurting exports. February trade balance data revealed the first trade deficit since March 2010, at a level of -204 million Australian dollars. The fear of a slowing Australian economy caused by fewer exports seems to be one of the main reasons pointing the RBA towards a sustained interest rate.

Today’s minutes, largely forecasting slower growth in Australia, cooled investor confidence in the Australian economy. That, with expectations that the RBA is unlikely to raise interest rates in the near term, contributed to a small Australian dollar selloff against the US dollar. Although it is too early to tell the true effects of the minutes on the Aussie dollar, today’s minutes had a cooling effect on the record-breaking Australian dollar.

RBA_Minutes_Suggests_More_Cautious_Policies_body_Picture_3.png, RBA Minutes Suggests More Cautious Policies, Australian Dollar Weakens

Chart generated with FXCM MarketScope 2.0

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19 April 2011 02:12 GMT