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Reserve Bank board hints at rates pause -

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Reserve Bank board hints at rates pause

Stephen Long reported this story on Tuesday, December 15, 2009 12:24:00

ELEANOR HALL: The minutes of the latest Reserve Bank board meeting reveal that the decision to lift
interest rates this month for an historic third month in a row was a close call.

But in doing so board members say they've increased their flexibility on interest rates at future
meetings.

And that suggests that the Reserve Bank may not be moving as hard or as fast on rates next year as
some analysts have been suggesting.

Our economics correspondent Stephen Long has been analysing the board minutes at the lock-up at the
Reserve Bank headquarters in Sydney and he joins us now.

So Stephen, how close a call was that decision to lift rates on the first of December?

STEPHEN LONG: Pretty close Eleanor if you believe the minutes. They say that the arguments were
finely balanced which in central bank parlance does suggest that it was a close call. Far closer
than market economists thought at the time when just about every one of the pundits before the
meeting was writing up that it was a done deal and rates were certain to go up.

Now they did go up but the board clearly canvassed the case for lifting and staying and in the end
they did so essentially to give themselves room to manoeuvre.

What they have said is that by lifting in December for a record third month in a row, that that
would give them the flexibility by materially shifting the status of monetary policy to a less
accommodative setting in the jargon to have flexibility available at future meetings and in plain
English that means that they were buying themselves room not to put up rates in February and it
suggests that they will pause if they can.

ELEANOR HALL: So given that, what should we be expecting on interest rates next year?

STEPHEN LONG: Well, slow and steady as she goes. I think it does imply. After the decision came
down on the 1st of December Eleanor, you saw financial market traders and economics rapidly
revising down their expectations of rapid fire rates movements and they did so on the basis of a
single line in the statement that the governor issued at the time when he said that there was a
material effect from the rate rises that they'd had, a material adjustment.

Now that has been confirmed by these minutes that essentially, by lifting three times a row they
are hoping that the can sit back and wait and see what goes on.

Of course, it will depend a lot on what happens in the domestic economy and we did see those
stronger than expected employment numbers recently. If there is a slew of strong economic data,
then they may lift in February but there is no certainty about a rise and it suggests that they do
want to pause.

ELEANOR HALL: And the RBA has previously been very upbeat about the prospects for the global
economy. Is that reflected in the board deliberations this time?

STEPHEN LONG: No. Again there is a contrast between the statement by the governor when they
announced that rise on the first of December where the statement said the global economy has
resumed growth and the tenor of the board minutes which say yes the major economies are growing
again but uncertainty remains about the strength and durability of the expansion once the positive
effects of an inventory cycle and the stimulus begin to ease and they note that private demand is
very, very weak in the core European economies. Asia of course, is a different story.

ELEANOR HALL: Stephen Long, our economics correspondent, thank you.