In Australia, economic conditions have been stronger than expected, after a mild downturn a year ago. The effects of the fiscal stimulus on consumer demand have now faded, but household finances are being supported by strong labour market outcomes and a recovery in net worth. Public infrastructure spending is now boosting demand, as is an upturn in housing construction. Investment in the resources sector is strong. The rate of unemployment appears to have peaked at a much lower level than earlier expected.In other words, the stimulus worked.
CPI inflation has risen somewhat recently as temporary factors that had been holding it down are now abating. Inflation is expected to be consistent with the target in 2010.In other words, the stimulus was not inflationary
Lenders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point. Since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being.In other words, thanks Westpac.
The news caught markets unawares
Late yesterday afternoon traders began to price in the possibility that the RBA would pause, and not raise rates. Overnight, they did just that, with RBA Governor Glen Stevens surprising the markets by keeping rates steady. The move surprised economists, who had been unanimous in their prediction of a 0.25% increase.In other words, the market was wrong and the Efficient Market Hypothesis took another drubbing.
