RBA leaves cash rate unchanged

THE central bank has given a clear sign it is ready to lift its policy interest rate if Australia's economic strength continues to point to higher inflation, the minutes of its September board meeting show.

The Reserve Bank of Australia (RBA) left the cash rate untouched on September 7 after board members weighed the risks of a second global shock against a booming domestic economy.

The RBA said on Tuesday its decision to hold the cash rate at 4.5 per cent for the fourth straight month was partly based on perceived risks for a subdued global economic outlook, including a renewed downturn in the US.

"The central scenario remained for the Australian economy to grow at trend pace, or a bit above, over the next few years," the minutes said.

"While policy had to be alert to these risks, members considered that if the central scenario came to pass it was likely that higher interest rates would be required."

An interest rate rise of 25 basis points will add about $48 dollars a month to repayments on a $300,000 mortgage.

The central bank has held the cash rate at 4.5 per cent since it took it there from 4.25 per cent in May.

Since October, the RBA lifted the cash rate from three per cent in six quarter of a per cent increments.

Balancing the risks of a major downturn in the US or slower than anticipated growth in resource hungry China, against the comparatively healthy Australian economy, the board decided to leave the rate on hold in September.

The board noted the June quarter underlying rate of inflation had moderated to 2.7 per cent, to be within the two to three per cent target band set by the RBA.

However, the bank noted booming investment in the mining sector posed a threat to low inflation.

"Members observed that previous investment booms and increases in the terms of trade had posed significant challenges for economic policy, and that high levels of resource utilisation were likely to put pressure on inflation.

While the bank was aware of the risks posed to the global and domestic economy, the board decided there was no need to lift the rate in September.

"For the immediate decision, there had been no significant change in the overall outlook, with conditions looking a little stronger domestically than they had at the previous meeting, but looking a little weaker internationally," the minutes said.

"With the (Australian) economy currently growing at around its trend rate ... the board's assessment was that the current setting of monetary policy remained appropriate for the time being."

The futures market on Monday is priced in a one in three chance the RBA will take the rate higher in early October following a speech in regional Victoria by RBA governor Glenn Stevens.

Mr Steven told his audience that the bank's task in the future will be to manage a robust economic upswing.

"Part of that task will, clearly, fall to monetary policy," he said.


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