THE Reserve Bank has acknowledged Europe's fast-spreading debt problems are emerging as a threat to the Australian economy and could set off a round of jitters in global credit markets.
The dominance of Europe in discussion at the RBA's last monthly board meeting suggests it is now paying closer attention to how the debt crisis is playing out.
The December 7 meeting was held before last week's move by ratings agency Moody's to cut Ireland's credit rating to three notches above junk.
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But minutes of the meeting, released yesterday, suggest the RBA is sticking to its medium-term view of the domestic economy, with growth here underpinned by the continued strength of Asia's key drivers, China and India.
The minutes provide economists with an insight into the central bank's thinking on the factors bearing on monetary policy.
Whether the RBA would have left the cash rate at 4.75 per cent, as it did, on December 7 in the absence of Europe's troubles is not clear from the minutes.
But they show the RBA took into account the banks' super-sized increases in mortgage rates after its 25-basis-point lift in the cash rate last month. The high level of the Australian dollar remains a factor in its thinking.
The board judged current monetary policy conditions as ''mildly restrictive'', though ''appropriate'' given the booming export market and positive outlook for business investment.
While the RBA is widely expected to begin a new round of rate rises next year, economists judged from the tone of the latest minutes that this would not start until April.
''The RBA is 'comfortable' with current policy settings and it could take some time for them to be uncomfortable again,'' said Commonwealth Bank senior economist Michael Workman. He believes the central bank may wait for clear signs of higher inflation and consistently strong jobs growth before lifting rates again.
The RBA also appears to be more relaxed about any signs of an overheating economy, for now at least.
The minutes said improved household savings rates and lower consumer spending had allowed business investment to rise without causing a build-up in inflationary pressures.
While Europe's debt problems provided downside risks to the global economy, the central bank said it was prepared to see how events played out before acting further.
Former Reserve Bank economist Paul Bloxham, now with HSBC, is tipping official cash rates will rise next year.
''If you believe, as we do, that the saving rate won't stay at its current historically high level all on its own- and something will need to restrain it - then you also have in mind that interest rates will need to rise further,'' he said.
By Eric Johnston
Source: www.smh.com.au
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