Interest rates could stay on hold

Australia’s central bank has indicated it has room to keep interest rates on hold as it assesses the impact of the European debt crisis on Asian growth, documents showed on Tuesday.


The Reserve Bank of Australia (RBA) said market confidence had been severely eroded by growing concerns about the fiscal situation in Greece, Spain and Portugal, with “sizeable deficits expected to persist over a number of years.”

Despite bailouts from the European Union and International Monetary Fund as well as austerity pushes in several eurozone nations, the RBA said uncertainty prevailed and would “inevitably weigh somewhat on prospects for global growth.”

“In areas such as Asia where growth had recently been strong, it had become more likely that the withdrawal of policy stimulus would be delayed as a result of the developments in Europe,” it said in the minutes of its June 1 meeting.

At that meeting, the central bank opted to leave rates on hold at 4.5 percent – pausing an aggressive series of six 0.25 percentage point hikes since October – after sharp falls in Australia’s stock market and currency.

The RBA said monetary policy had moved from “very expansionary settings” at the height of the global financial crisis to now having rates at their “average levels of the past decade or so”, giving it room to hold fire for now.

“Members judged that these previous actions (of raising rates) afforded policy the flexibility to await information on how the recent market uncertainty might affect the global economy, as well as news about the outlook for inflation,” the RBA said.

Resource-rich Australia dodged the financial crisis due to strong exports to Asia, which helped it become the only advanced economy not to enter recession and the first to raise interest rates, from 49-year lows of 3.0 percent.