NAB's excellent rates strategist, Peter Jolly, on the RBA's prevarication (ie, swoop like a hawk or dither like a dove), and what looks increasingly like a rolling of the executive's forward-looking recommendation to hawk-up in October:
"This brings us to yesterday’s minutes from the RBA’s October 5 Board meeting, which for me more than anything else highlighted the difficulties of being pre-emptive. The forward looking part of the RBA wanted to tighten on October 5 - they said explicitly that their medium term inflation outlook argued for a hike. What made the decision “finely balanced” were the inevitable vagaries around the forecast, stemming from some softer recent data as well as pervasive global uncertainty. They did however say “While the Board recognised that it could not wait indefinitely to see whether risks materialised, members judged that they had the flexibility to do so on this occasion.” Fair enough. But this statement also highlights that they clearly do not want a re-run of 2007 and 2008, when they underestimated the inflationary pulse generated by Commodity Boom Mark I, where underlying inflation shot as high as 4%, and they tightened too late and ultimately by too much. They want to be pre-emptive.
So how long can they risk waiting before tightening again? Not that long and for mine a hike in the next few months is a near certainty – whether it’s November 2 (40% priced) or they wait for December 7 (50% priced) is a harder call. Next Wednesday’s Q3 CPI will be important, although NAB’s forecast for underlying to be +0.7%/2.5% is not too scary. Certainly a +0.8% or more increase would probably prompt a hike. Also relevant will be whether Banks lift their lending rates due to higher funding costs and also what the $A does."
