Today the RBA left the cash rate unchanged at 4.75%. While uncertainty about global growth remains high, sitting on the sidelines is most likely to be the RBA strategy. The RBA continues to remain caught between the longer term positive fundamentals (ToT and mining capex) and the near-term growth risks originating in EU. The more interesting part of the statement however centres around their view about inflation. They appear to have hope that the recent softening in the labour market may contain wages growth and inflation. Moreover, they believe the path for inflation MAY now be more consistent with the 2-3% target in 2012 and 2013. Accordingly, they believe have the capacity to ease if needed. Of course, we always believed the RBA would act if the economy needed a boost. A rolling over in commodity prices, primarily in iorn ore and coal, would be the sign that RBA easing was needed. No real signs of that yet. Moreover, the Barcap view of the world suggests it won’t be needed. Signs in stabilisation in Global PMIs yesterday lends support to that idea. Pay front OIS contract still looks to be an attractive trade.
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