RBA lifted rates on strong economy; concerned over Greece

THE RBA raised interest rates in response to data suggesting the economy growing as expected.

THE Reserve Bank lifted the cash rate to 4 per cent in early March in response to two months of data suggesting the economy might be growing at or close to trend.

But board members expressed concern that the fallout from the Greek financial crisis might have implications for the Australian economy, the minutes of the RBA's March 2 board meeting say.

"Members concluded that the evidence that had become available recently had confirmed that it remained appropriate for interest rates to move gradually towards normal levels, and that it was time to make take another step in that direction," the minutes, released this morning, said.

"A significant amount of data had become available since the previous meeting, including two months of data on both retail sales and building approvals, an additional month of data on employment and various pieces of information feeding into the December quarter national accounts.

"Some recent indicators suggested that growth might already have been running at or close to trend for a few months."

Following its March 2 board meeting the central bank took the cash rate to 4 per cent from 3.75 per cent.
It was the Bank's first rate rise for 2010 after it decided to pause in February.

The Bank rapidly lifted the cash rate between October and December last year from a 49-year low of 3 per cent to 3.75 per cent.

But board members also focused discussion on Greece's sovereign debt crisis and resulting heightened volatility in financial markets and its implications for Australia.

The minutes show the central bank was concerned about the possibility of contagion, that the Greek problem could spread to other parts of Europe.

"The main risk was the possibility of contagion to other sovereigns and perhaps other markets, primarily in the euro area.

"Members agreed the fiscal problems in Europe, if not resolved satisfactorily, could result in renewed turmoil in markets and fresh weakness in the global economy, which could have implications for Australia.

"But while that outcome could not be ruled out, it was not the most likely one."

The board noted the exposure of Australian banks to European debt were minimal, and it concurred that "the appropriate course of action was to set policy as required by the most likely outcome, and to be ready to respond to other outcomes if they eventuated."

Despite most Western economies living under soft economic conditions, Australia's and the rest of Asia continued to be robust, the minutes said, with industrial production and exports strong.

"Most Asian economies had solid (gross domestic product) outcomes in the December quarter, though there were some exceptions."

RBA staff estimates were that Australia's national accounts, which were released on March 3, would show economic growth of 0.75 to 1 per cent for the December quarter.

When released, the data showed the economy grew by 0.9 per cent in the last three months of 2009.

The Board also noted the sharp decline in unemployment in January, with ABS data at the time showing the economy had generated 195,000 jobs since September 2009 and an unemployment rate of 5.3 per cent.

The jobless rate for January has since been revised down to 5.2 per cent, while the rate in February was 5.3 per cent.