As you know, I think they should hike, and I am absolutely confident that the correct policy response is to hike. But why after two consecutive strong quarterly core inflation prints might the RBA choose not to hike today? If they don't hike, don't be fooled into thinking they are dovish. They are not. So there are a few credible reasons regarding the delay:
1/ The RBA wants to prepare the community for a hike in September, and the 100 page Statement on Monetary Policy, which will contain its new inflation forecasts, provides the Bank with the perfect opportunity to do so (by upgrading its inflation projections out to 2013);
2/ Recent financial market volatility (US debt crisis), and the fact that nobody expects them to hike. The RBA is fond of telling us that it likes to smooth financial market expectations (why I am not sure), and avoid surprises (November last year anyone!). The release of the Statement on Monetary Policy, and the short statement today, gives the RBA a chance to bring the financial markets along with it in anticipation of the next hike. (But haven't they been doing this since March, and don't they lose credibility every time they change their mind?);
3/ Possibly the challenges associated with substantial Board renewal. Two long-serving Board members have recently departed, including one noted hawk, and it will likely take some time for the RBA to convince the two new Board members of their world view and the inflation risks associated with it; and
4) The RBA is no longer a genuine 'inflation-targeting' central bank, and is being compromised by an intrinsically dovish and conflicted Board dominated by private sector representatives that are adversely affected by higher rates (and/or currency). This means that the RBA is more likely to accept 3-4% pa inflation outcomes if economic growth and employment are sub-par.
