RBA weighs boom against bust

by BN21 Dec 2011

The Reserve Bank decision to cut the cash rate in December has been revealed as a close call, with the board having to weigh Australia's boom against a European bust.

As the year draws to a close, the minutes of the RBA's meeting in early December show the board was satisfied with recent domestic economic data, with overall growth "consistant with trend".

"There had been further evidence that a major investment boom was in progress and the overall economy was expanding at a pace broadly in line with trend," the RBA minutes read.

"Australia's main trading partners were also still recording solid growth. This did not suggest any strong need to cut interest rates."

However, the RBA's assessment that sovereign credit and banking problems in Europe presented a risk of subdued economic activity and the "non-trivial" possibility of a sharp contraction spurred action.

"Developments in Europe continued to pose downside risks to the global economy and, consequently, also to Australia," the RBA minutes stated.

"These risks had, if anything, increased though the timing and magnitude of any effects that might flow from them remained very difficult to predict."

The RBA said with inflation currently within its target, there was scope for the 0.25% cut.

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