Tentative signs of improvement in the global economy, particularly in Asia, prompted the Reserve Bank of Australia (RBA) to leave interest rates unchanged in May.
The RBA kept the cash rate unchanged at a 49-year low of three per cent at its board meeting two weeks ago.
The minutes of the central bank’s May 5 meeting, released on Tuesday, show board members noted that recent economic data suggested some improvement in confidence and economic activity.
“The strongest signs were in Asia, with production in China rebounding particularly quickly,” the minutes said.
“While it was too early to be confident about the durability of this trend, the evidence was accumulating that the maximum rate of global economic contraction may have passed.”
The board noted in the minutes that recent data in China had been positive, with output growth picking up in the March quarter and industrial production recently recording a “significant increase”.
Board members said there were signs that significant fiscal and monetary policy stimulus applied to the domestic economy over the past months was supporting demand.
In terms of monetary policy, official interest rates have been cut by 425 basis points between September last year and April.
Moreover, the federal government announced two fiscal stimulus packages worth a combined $52 billion, which included, among other things, cash handouts to pensioners, carers and low-to-middle income families and tax payers.
The RBA board had debated whether the cash rate should be eased further in May or maintained at its current level “pending further information on how economic and financial conditions were unfolding”.
“Members judged that the best course for this meeting was to leave the cash rate unchanged,” the minutes said.
“They would continue to monitor the strength and durability of the tentative signs of an improvement in the global and domestic economies.”
The board noted that although some Asian economies were showing signs of recovery, “the best that could be said for the global economy as a whole was that output was beginning to stabilise after the earlier sharp falls”.
It said the most likely scenario was that growth would remain below trend “for some time”, leading to a further build-up in excess capacity and, therefore, a decline in global inflation.
Commenting on the domestic economy, the board said Australia would experience higher levels of unemployment and falling inflation over the coming year, with “substantial growth” not expected to resume until around the end of the year.
Despite this, the board repeated similar comments by central bank officials in recent speeches, stating that Australia was likely to “record better outcomes that most other advanced economies in 2009 and 2010”.
This was due to the healthy state of the domestic banking system and the impact of recent stimulus, the minutes said.
“The Australian banks remained in good financial health, in absolute terms and particularly in comparison with their overseas counterparts,” the minutes said.