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SYDNEY - Australia's central bank saw strong reasons for a rise in interest rates at its December policy meeting but passed on an increase because of the global credit squeeze, minutes of its December 4 policy meeting showed yesterday.
The Reserve Bank of Australia's (RBA) policy-making board remained concerned about inflation, given the strength of domestic demand, and only a rise in domestic borrowing costs caused by the credit squeeze had stayed their hand.
"The information available on the domestic economy thus suggested that higher interest rates were likely to be required," the minutes showed.
"Members indicated that, absent the changes in market yields since the November meeting, there would have been a strong case on domestic grounds for a rise in the cash rate at this meeting," the minutes showed.
Battling to restrain inflation, the central bank has raised rates twice since August, taking them to an 11-year peak of 6.75 per cent.
"But given that a rise in money market rates had occurred, members observed that a further rise in the cash rate at this meeting, by adding to these market pressures, would result in quite a significant tightening of overall financial conditions over a short period," the RBA went on.
"On the evidence currently available, and given the uncertainty over the global outlook, this did not appear to be immediately warranted," the minutes showed.
The rates banks charge each other to borrow Australian dollars have climbed sharply in the past few weeks and are unusually far above the overnight rate. Some non-bank lenders have already raised their home and business rates and the major banks are expected to lift their variable mortgage rates soon.
Still, board members cautioned that they would be watching financial market conditions carefully to see if they tightened enough to contain inflation without a rise in the official cash rate. The RBA's next policy meeting is in February.
Financial markets took the minutes as fairly hawkish and bond and bill futures trimmed early gains.
"It's quite hawkish," said David deGaris, a senior economist at nabCapital. "Obviously, much is dependent on overseas events. But the RBA wants the market to know that its tightening bias is still very much there, and that message comes through loud and clear in these minutes."
Futures markets currently imply around a 35 per cent probability of a rise to 7 per cent at the RBA's February meeting.
- Reuters
