Lower Inflation Provides Scope for Further Interest Rate Cuts - Reserve Bank of Australia

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By Prasanth Aby Thomas | February 19, 2013 4:53 PM EST

A train loaded with iron ore travelling towards the Rio Tinto Parker Point iron ore facility in Dampier in the Pilbara region of Western Australia

The Reserve Bank of Australia (RBA) has indicated that it can opt for further monetary easing measures, if needed, considering the lower inflation levels in the country.

However, the bank chose to keep the interest rates steady at its February meeting as the reduced interest rates have begun to help economic growth in the country.  

"Interest rate-sensitive parts of the economy had shown some signs of responding to these lower rates, which were well below their longer-run averages, and further effects could be expected over time," showed the minutes of RBA's meeting held on 5 February.

"Noting that monetary policy was already accommodative as a result of the substantial easing of policy over the past 15 months, and that this stimulus was continuing to work its way through the economy, the board judged that it was prudent to leave the cash rate unchanged at this meeting.''

It added that the "scope to ease policy further, should that be necessary," given that the prices remain under control.

The central bank cut its benchmark interest rates by 1.75 percent between November 2011 and December 2012 and retained it at 3 percent in February, a level similar to those seen during the global financial crisis.

"Thanks to inflation remaining well-contained, the RBA will ease further if domestic-demand doesn't keep improving," Katrina Ell, an economist at Moody's Analytics in Sydney told Bloomberg.  

"But we are near the end of the easing cycle".

But RBA noted that the strength of the Australian dollar, which has climbed about 62 percent in the past four years, has had a negative impact on certain sectors. The local currency's performance had contributed to the central bank's decision to lower its economic growth forecasts to 2.5 percent for the current year.

The weakness in sectors outside mining has proved detrimental to the Australian economy of late. Although the unemployment rates managed to hold steady in January, other indicators have pointed to weakness in the economy.

But the recent rise in prices of iron ore, the nation's most valuable shipment, on the back of increased Chinese demand has helped the sector.

"Iron ore prices had run well ahead of Chinese steel prices in recent months and it was widely expected that iron ore prices would not be sustained at these high levels," the RBA said.

The central bank also noted that the global financial situation has improved since the beginning of 2013, with the US averting a fiscal crisis along with continued growth signs from China and government-backed stimulus measures in Japan.

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