The tighter credit environment created by the sub-prime crisis could be the only thing that prevents the Reserve Bank of Australia from lifting interest rates when it next meets, in February 2008.
The minutes of the RBA’s December meeting, released yesterday, confirm that the international credit squeeze resulted in a de facto interest rate that reduced pressure on the RBA to act.
And, according to the minutes, a key issue for the next RBA meeting will be whether tighter credit terms caused by the crisis will be sufficient to keep the lid on inflation into the new year.
“The question to be addressed at that time would be whether the interest rates faced by borrowers as a result of the combination of policy action and market developments would exert sufficient restraint to contain inflation over the medium term,” the minutes state.
Markets currently have the chance of an interest rate rise in February priced in at a little less than 50%, although both Westpac and ANZ Banks have an extra 0.25% rate rise pencilled in by March 2008.
TD Securities senior strategist Joshua Williamson says the more intense volatility of international credit markets over the past few days is making it increasingly difficult to argue the RBA will lift rates early next year.
“We believe the risk for February is on the upside, but the big wildcard will be how the global economy and financial markets stand up over the coming months,” Williamson says.
The crucial test, according to Williamson, will be December 2007 quarter CPI data due to be published on 24 January next year.
“If underlying inflation is up (the RBA) will be arguing strongly for a rate increase at the February meeting,” he says.