August 19, 2014 / 1:35 AM / in 6 years

Australia's central bank ponders risks to economic outlook

SYDNEY, Aug 19 (Reuters) - Australia’s central bank sees significant uncertainties around the economic outlook, which was why interest rates were likely to stay at record lows for some time yet.

A construction crane is reflected on the Reserve Bank of Australia (RBA) building in central Sydney April 2, 2013. REUTERS/Daniel Munoz

In minutes of its August 5 meeting, where the central bank marked a full year without a rate change, the Reserve Bank of Australia (RBA) also said there was a “notable degree” of spare capacity in the labour market.

“Members noted that there was inevitably a significant degree of uncertainty about the outlook, given the number of forces working in different directions,” the minutes said.

As a result, the Board felt it was important to consider the risks to the bank’s forecast for an eventual pick up in economic growth.

“The Board judged that monetary policy was appropriately configured and that, on present indications, the most prudent course was likely to be a period of stability in interest rates.”

Interbank futures imply a mere one-in-three chance of a quarter point cut to the 2.5 percent cash rate by year-end <0#YIB:> and have 9 basis points worth of easing priced in over a 12-month period. CSSY.

The RBA reiterated its central view that the slowdown in mining investment would deepen and that fiscal consolidation and a still high local dollar would further restrain growth.

On the other hand, it said that low interest rates were fuelling a recovery in the housing market and supporting consumption.

“Overall, GDP growth was likely to have slowed to a more moderate pace in the June quarter and was expected to be below trend over 2014/15, before picking up thereafter,” it said.

On the labour market, the RBA said it was likely to be some time before unemployment declined consistently.

The meeting came before government data showed the jobless rate spiked to a 12-year peak of 6.4 percent in July, well above expectations.

Slack in the labour market meant wage growth was likely to be subdued, which in turn should help keep inflation within the bank’s 2-3 percent target over the medium term.

The minutes mirrored the cautious tone of the RBA’s 76-page quarterly report released a few days after the meeting.

RBA Governor Glenn Stevens will probably express the same sentiment on Wednesday at his semi-annual parliamentary testimony.

The RBA board next meets on September 2.

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