RBA to stay on hold despite inflation concerns

The TD Securities-Melbourne Institute inflation gauge reported yesterday a 0.3% rise in November. The gauge's trimmed mean measure of annual underlying inflation was 3.4%, above the Reserve Bank of Australia's (RBA) target band of 2 - 3%.

However lingering concerns over global credit issues and some recent soft domestic economic data support the consensus view that the RBA will stay on hold tomorrow.

Yesterday's report showing a fall in gross operating profits in 3Q07 and today's soft retail sales figures suggest the RBA can afford to take a breather tomorrow. Adjusting for inflation retail sales actually declined on seasonally adjusted basis in November. The nominal increase was just 0.2% from the previous month and after adjusting for inflation dropped -0.1%.

Interestingly, while the consensus views a rate rise tomorrow as doubtful most have penciled in a rate hike for February 2008. If most economists believe global credit concerns are enough to keep the central bank on hold this month does that mean they expect credit market problems to have abated in two months time?

The US economy looks more miserable every week. Mosts US economists still don't think a recession is coming let alone a hard landing scenario. However if a hard landing were realized and credit concerns fail to recede in the first quarter of 2008, is it plausible that the RBA might be done raising rates for a while? Japan and Europe have all but thrown in the towel on rate rises and if a significant slowdown in global growth ensues, the RBA may soon be following suit.