RBA - held rates because it needed to

The RBA today did the right thing by giving the non-mining sector of the Australian economy the benefit of the doubt. That is, having jawboned the market to the extent that the cohort of Bank Chief Economists thought a rate rise was a fait accompli they effectively got almost as much bang for their buck as an actual tightening via media and commentariat speculation.

We are not backward in coming forward as readers know and we would say that with respect to this cohort, many of whom we know well and most of whom we like or respect, we think they should stop playing the man and not the ball.

Crucially though if playing the man they should listen to what the man says not what they think he said. Here's a quote we referenced last week when we said the RBA shouldn't go and we didn't think they would. It's from the Speech Governor Stevens gave in September that supposedly turned market expectations.

"Often, the expectation of what will happen to the cash rate in the future is just as important as, or even more important than, the level of the cash rate today. For this reason what the Bank says – or what people think we have said – can be very influential on markets and behaviour. It is for this reason that central bankers are usually so guarded in public comments."

Now many pundits will now say that no move in October guarantees a move in November but we believe that is flawed logic. If that was the case why wait. The RBA waits because its sees settings as appropriate not because it has already fixed to move next month. Monetary policy moves with long lags so if the RBA thought now they needed to tighten next month they would have done it today. Of that we have no doubt.

That's not to say they don't have a tightening bias, clearly they told us they do. But for the moment there is enough uncertainty for them to hold fire. Clearly Q2 CPI later this month is crucial but we think the weakness in the non-mining sector and the external economic environment will continue to provide a counter-balance to mining's strength. We hope the RBA holds fire for a while yet.