Global economic uncertainty is weakening local demand and could dampen the inflation outlook over the medium term, the central bank says.
In the minutes of its August 2 board meeting, the Reserve Bank of Australia said downside risks to local economic growth and inflation brought on by lingering uncertainty about global conditions had become more pronounced.
There was still "considerable uncertainty" about how long it would take to resolve the US and Europe's sovereign debt problems and what effect ongoing market volatility would have on the global economy, it said.
Consequently, the RBA left the official cash rate on hold at 4.75 per cent, where it has been since November 2010.
"If the financial market turmoil continued, it could further weaken household and business confidence," the RBA said in the minutes, released today.
"This in turn could weaken the outlook for demand relative to the central forecast and, over the medium term, dampen the inflation outlook."
Global financial markets were thrown into turmoil last week, with some major bourses plunging more than five per cent in one session, after the US lost its prized AAA credit rating for the first time.
Standard and Poor's lowered the rating on US government debt from AAA to AA+, saying it was concerned about the ability of policy makers to manage the country's burgeoning sovereign debt.
RBA board members were also concerned about the medium term outlook for inflation, given that underlying inflation had started to pick up and was forecast to rise above the target range over the next few years.
However, the bank judged that "subdued household spending and the appreciation of the exchange rate were likely to exert some dampening influence on inflation in the period ahead."
Employment growth had slowed from the rapid pace of 2010 and the unemployment rate was no longer falling.
"The forward looking indicators continued to point to moderate employment growth over the period ahead, although the staff's liaison with businesses indicated some caution in hiring plans," the RBA said.
The central bank acknowledged that activity in parts of the economy was subdued, with consumers remaining cautious and business confidence having fallen.
Credit growth had slowed over recent months and was "very subdued by historical standards", asset prices had softened and the exchange rate was high.
"Taken together they suggested that financial conditions were already exerting a reasonable degree of restraint."
The RBA said it had revised its growth forecast for 2011 down to 3.25 per cent.
Growth was expected to be around 3.75 per cent in 2012 and 2013, as coal production recovered.
