No cuts on the RBA's radar - reposted by Andre Di Cioccio

The RBA statement was a breath of fresh air. Ultimately and relative to current market pricing (57% priced for a cut) the RBA statement is hawkish. There is no denying that. In reality though, they don’t seem to have changed their view much. I love them for that. I was actually concerned they may capitulate in the face of extreme bearish pressure - but no. “The global economy has continued to expand over recent months, consistent with a trend pace of growth. The expansion remains uneven with the major advanced economies recording only modest growth overall, but growth in Asia and Latin America, to date, very strong.”

The major caveat is sentiment in financial markets. As I’ve said before, financial markets are shaping up to be the single biggest threat to global growth. The Bank was conservative in its assessment “Caution in financial markets has been evident in the past couple of months, driven principally by concerns about European sovereigns and banks but also by some uncertainty about the pace of future global growth. Financial prices have been more volatile.”

It’s for this reason they took out the the "near-term” reference regarding monetary policy - a minor tweak from last month's “the Board views this setting of monetary policy as appropriate.”

So maybe we won’t get that August rate hike I’ve been forecasting, although I think that’s still the best bet for now. A lot will depend on how financial market sentiment is balanced with the CPI result on July 28. But make no mistake, the RBA is not entertaining the idea of a cut. At best they’ll push out plans for further rate increases.

The Bank retained its view that the terms of trade would add to incomes and demand. Indeed we got a taste of that earlier today with the trade data (where we saw exports rise 6% and imports rise 4%). Add to that positive commentary regarding the labour market, consumption, credit and business investment - well they haven’t left much room for doubt.

So that’s where we are at. Market sentiment may be poisonous, but if we have learnt one thing this year, it’s that sentiment can and does change rapidly. There are headwinds for sure and we are faced with very serious risks. Nevertheless, and as the RBA’s statement makes plain, there is more reason to believe that we'll stay firmly on the path to recovery. http://www.rba.gov.au/media-releases/2010/mr-10-12.html