European debt problems and subdued household spending influenced the Reserve Bank's decision to leave interest rates on hold at 4.75 per cent, minutes from RBA December meeting reveals.
The Board noted that the deterioration in the financial situation in Europe over the past month had increased the downside risks to the global economy. These conditions in Europe might "settle down", but they also could escalate and disrupt global financial markets which in turn would affect the Australian economy more than any future reduction in demand for Australia's commodity exports:
If this prompted a fresh retreat from risk-taking in global financial markets, it would probably have more impact on Australia than any trade effect.
The board also noted that household consumption and borrowing still was restrained despite high levels of confidence, and there was a noticeable increase in the rate of household savings.
This restraint, if it continued, would provide some scope for investment to rise without causing aggregate demand to grow too quickly and inflationary pressures to build.
The RBA board also took the current high level of the Australian dollar and the additional increases in home loan rates from commercial banks into consideration in keeping the cash rate on hold.
While RBA minutes included no direct reference to its expectations for the interest rate outlook, however November interest rate raise gives them more time to evaluate situation internationally and locally. Expect no rate rises for at least couple of months.