Bad outcome for Europe less likely: RBA

by Adam Smith21 Mar 2012

The outlook for the European debt crisis is looking sunnier in the eyes of the RBA.

In the minutes from the March board meeting in which it kept rates on hold, the Reserve Bank said the probability "of a very bad outcome" for Europe "had receded a little further". While the Bank said this "very bad outcome" could still materialise, it claimed the risk seemed less likely of eventuating than it did a few months ago.

The Bank also referred to out-of-cycle moves by lenders, but called the hikes "relatively small" and said lending rates remained around average levels. Funding costs were also easing, the RBA claimed.

"Following the Board's decision at the February meeting to leave the cash rate unchanged, most lenders had raised their housing indicator rates, by an average of around 10bps. Conditions in local credit markets continued to improve and the banks issued $12bn in bonds in February, with two-thirds of that debt unsecured, and sizeable issuance had continued in early March. Members noted that the relative cost of issuance had continued to decline since the beginning of the year, though it remained higher than in mid-2011," the Reserve said.

The RBA board also pointed to the mining boom as balancing out weakness in other sectors.

"In this regard, most information thus far had indicated that weakness in parts of the economy – including manufacturing, building construction and parts of the retail sector – was being approximately balanced by the strength in the mining sector and some services industries," the Bank said.

Overall, the Bank said the current cash rate of 4.25% remained appropriate, but argued it had "ample scope" for easing should economic conditions take a turn for the worse.

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