RBA Board decided to leave cash rate unchanged at 2%

Following the print of the September quarter Consumer Price Index markets priced a probability of a rate cut at around 70%. With the clearer guidance from the US Federal Reserve that a Fed rate hike in December was a realistic prospect markets revised down that probability to around 50%.

How that downward revision could be justified is not seen and therefore were prepared to look through the low CPI. In the event the Bank confirmed its somewhat more confident view around the growth outlook citing "business surveys suggest a gradual improvement in conditions over the past year" and "somewhat stronger growth in employment"; "prospects for an improvement in economic conditions had firmed a little over recent months".

"There was some risk that the very low (0.3%) quarterly print for the CPI in the December quarter may have led the Bank to question the prospect that inflation would remain within the target band of 2-3%", says Westpac. 

However in the Governor's statement, he confirms his view that inflation will remain within the target over the next one to two years, albeit a little lower than earlier expected.

This theme around inflation is confirmed in the all-important final paragraph where the Bank adopts an explicit, although moderate, easing bias. This bias is expressed with the words "the inflation outlook MAY afford scope for further easing of policy, should that be appropriate to lend support to demand". 

This is a weaker easing bias than the terms that had been used around inflation in the past, e.g. "were demand conditions to weaken materially the inflation outlook WOULD provide scope for easier monetary policy" (April 2012). 

Further evidence that this is a softer bias comes with the first sentence in the closing paragraph where the Governor assesses that "prospects for an improvement in economic conditions had firmed a little over recent months".

Commentary around housing and credit was also consistent with the "unchanged" decision. Overall conditions in the housing market are still described as "accommodative" and credit growth has increased a little in recent months. 

Dwelling prices in Melbourne and Sydney and reported to be continuing to rise albeit at a more moderate pace. There is no change in the assessment of the prospects that the Fed will start increasing its policy rate, just being described as "in the period ahead" and global financial conditions continue to be "very accommodative".

In previous statements the Governor has singled out weakening prospects in China but China does not rate a mention in this statement although recent falls in the terms of trade are noted. There is no change in the commentary around the Australian dollar, "the Australian dollar is adjusting to significant declines in key commodity prices".