Global credit has been too cheap for too long and the recent toughening of borrowing conditions, while traumatic for the market, are necessary, according to Reserve Bank of Australia (RBA) chief Glenn Stevens.
"An adjustment to investor behaviour needed to occur, and was almost certainly overdue. Such adjustments often are not entirely smooth, and are frequently triggered, as in this case, by the realisation that credit terms had been too generous for too long," Stevens said.
The continuing strength of both domestic and global market not withstanding, the situation would have to be continually monitored, he said.
"Sometimes, however, the ensuing retreat can go too far, resulting in a widespread withdrawal from the provision of credit that unnecessarily cramps the pace of economic expansion. We will, therefore, have to continue to watch carefully how this unfolds over the period ahead."
According to ICAP senior economist Matthew Johnson, while domestic inflation concerns remain predominant, he acknowledged that Stevens will continue to monitor the global credit situation.
"Domestic conditions justify a rate hike, but as a small open economy Australia is unlikely to survive a credit crunch and a global recession - so Stevens is keeping a weather eye on offshore credit markets, while worrying about domestic inflation," Johnson said.
"RBA forecasts are at the limit of acceptability, but Stevens is acknowledging that risk from credit markets keeps the rate hike question a two way bet."
