Terry McCrann correctly calls it the RBA's, and Glenn Stevens', moment of truth. This is how ICAP's Adam Carr describes the situation:
"Two back-to-back increases in core inflation of 0.9 per cent would ordinarily lock in a rate hike this week (RBA decision, Tuesday 1430 AEST) – and if I thought that we lived in a sane world, that would be my call. But I don’t think we live in a sane world. We live in a world where some board members stubbornly refuse to acknowledge that inflation is on the march, despite very clear supporting evidence. We live in a world where, despite two of our largest retailers posting solid sales growth and record sales, people talk about the retailing recession. We are in a world where the earth is flat!
So my formal forecast for this week is: I have no idea. I’m in a position where I simply can’t call what the RBA will do. Will the US default? I doubt it. Will the board hold off because of it? Possibly. Add it to the retailing recession and Australian’s deflation problem. As I discussed last week though, it doesn’t really matter. There is no point in being a hero and punting on this meeting when the market is still pricing in a rate cut (10 per cent) by year-end. That has paid well so far, thankfully, and I’d keep on it. I would look to that and 2012, which has even higher probabilities of cuts priced in.
Now if this kind of lunacy is indeed the majority view on the board, then we won’t be getting a rate hike this week. The problem is that it’s impossible to know exactly how popular the retailing recession/no inflation view is. We know the RBA aren’t fans. But they appear to have been rolled by board members who seem to prefer the whispers of the club, the grapevine and anecdote, to hard analytics. So who knows what the view is? I mean in June, strong domestic demand, high inflation, a surge in upstream prices pressure, low unemployment and strong global growth wasn’t sufficient to see them hike. It could be that it’s not sufficient at this meeting either or any other meeting for that matter."
