Fears of second GFC kept rates on hold: RBA

Fear of a second global financial crisis was the deciding factor in keeping interest rates on hold, according to the Reserve Bank’s August 2 monetary policy meeting minutes released today.

“Members discussed the downside risks to global growth, in particular those risks stemming from the fiscal problems in the United States and Europe. It was possible that these could play out in a disruptive manner, leading to a marked rise in global risk aversion, as had occurred in 2008,” the minutes read.

RBA board members also noted that h

ousing credit growth had slowed further and the rate of credit card debt repayment had picked up.

"Housing price data suggested that nationwide prices had fallen slightly over recent months, to be down by around 2% over the past year," the minutes read.

Despite these concerns, the minutes reveal that the RBA is still weighing up whether to leave rates on hold or lift them, rather than considering the possibility of a rate cut. It notes the European Central Bank raised rates in July.

Rising inflation above target levels remains a concern.

“The recent inflation data had been higher than expected…  Measures of underlying inflation had also picked up, and it was reasonable to conclude that the earlier easing in underlying inflation had run its course,” the minutes read.

“Members considered whether the recent information warranted further policy tightening. The argument for tightening further was that underlying inflation had started to pick up and the central projection in the staff forecasts envisaged it rising above the target range during the forecast period.

“The case against tightening at this meeting was that the downside risks to demand had probably increased, as a result of the acute uncertainty in global financial markets over the recent period.

“If the financial market turmoil continued, it could further weaken household and business confidence. This in turn could weaken the outlook for demand relative to the central forecast and, over the medium term, dampen the inflation outlook.”

Other local factors noted by the RBA board included “very subdued” credit growth, softer asset prices and the high exchange rate.

“Taken together they suggested that financial conditions were already exerting a reasonable degree of restraint,” the board says.

“Having considered all these factors, members judged that it was prudent to leave the setting of monetary policy steady at this meeting, and to continue to assess the outlook for growth and inflation at future meetings,” the board concludes.