RBA stands ready to lift rates in February

Despite growing concern about international economic conditions going into 2008 in the wake of the global credit crunch, the Reserve Bank is still of a mind to increase interest rates in Australia.

In fact, it is only these global uncertainties that saved Australian borrowers from a Christmas rate rise earlier this month. The recent decision by the RBA to publish the minutes of meetings now gives us greater insight into its monetary policy deliberations. And its clear from the minutes of the December meeting the sub-prime-lending-inspired woes on credit markets and the potential spill-over to the wider economy, especially in the US, is the only thing currently standing in the way of official interest rates going to 7 per cent here in Australia.

There is good news for home loan borrowers in the holding off on a further interest rate rise but for business borrowers it is a different story. The RBA notes that commercial borrowing rates for business have been edging up as lenders pass through higher funding costs in financial markets. There has already been the equivalent of an extra rate rise imposed on the business sector and that will have a dampening effect on the economy the RBA would otherwise have hoped for in an official rate rise.

Home borrowers can thank the competitive nature of the home loan market these days which has allowed them to escape the market-driven rise in rates. But the respite may not last long.

The RBA says it still fully expects the strength in the Australian economy to continue – more job creation, solid economic growth and inflationary pressure. The critical time for home borrowers is late January when the next quarterly inflation figures come out, quite possibly forcing the RBA’s hand on another 0.25 per cent rate rise at its first monetary policy meeting of 2008 in early February.

There is, however, a growing feeling that the worst on international credit markets is yet to come and any deterioration on the global scene may be the only thing that might prevent another rate rise here – but it is not something to hope for.