The Central Bank That Won't Get the Memo

1. The RBA holds 4.35% and keeps the safety off

The number was never the story. All 37 economists in the Reuters poll had the cash rate staying at 4.35%, the level it reached after three increases in the first half of the year, and it duly stayed there. What made the meeting worth watching was the Board admitting, in writing, that it had weighed a hike and chosen to wait. The statement said it "remains concerned about the upside risks to the inflation outlook" and that inflation is still too high. Governor Michele Bullock confirmed at the press conference that a rise and a hold were both on the table, and declined to rule out further tightening.

The worry has numbers behind it. The trimmed mean, the measure the RBA actually targets, sat at 3.6% in the June quarter, with headline inflation at 3.8%, both comfortably above the 2 to 3% band. Three hikes worth 75 basis points this year have left the cash rate at its equal-highest in roughly fifteen years. Bullock told the room that a period of subdued growth would be needed to bring inflation down sustainably, which is a central banker's way of saying the pain is the plan.

The read: this was a hold that spent its whole press conference describing the conditions for a hike. When a bank keeps the safety off and tells you why, is that a pause, or a threat with a delay on it?

2. Everyone else priced a cut; Australia priced a maybe-hike

Two issues ago this publication watched the Fed's three dissenters lose their argument for a hike the moment US payrolls printed minus 23,000 and September tightening odds collapsed to about 42%. That pivot spread this week. China reported July consumer prices up just 0.5% on the year, the softest reading since January, and the deflation conversation started up again. The developed-world trade was cuts, not hikes.

Into that, the RBA is the one major central bank still openly costing out a rise. And here is the awkward part: the market barely blinked. AUD/USD spent the day pinned in a 0.704 to 0.707 range and closed near 0.7050, and 27 of 36 economists still see no change through year-end. Traders pocketed the hawkish language and priced the dovish base case anyway. Somebody in that room is wrong.

The read: a central bank told the market it might hike, and the currency moved less than a rounding error. Either the RBA is posturing and the market knows it, or a bank that has already gone three times this year has one more in it and nobody believes it will need to use it. That gap is where the next surprise lives.

3. Australia keeps the oil shock the Fed just walked away from

The RBA named its fear, and it is a familiar one on these pages. The Board wrote that the Middle East conflict has fed through to inflation by less than expected so far, but that oil and related commodity prices remain higher than they were before the war, and it listed that as a live upside risk. That is the exact shock the Fed's dissenters invoked a fortnight ago and then dropped when their own labour market cracked. Australia has picked it back up.

Pointing the other way is Australia's biggest customer. Chinese consumer prices barely rose in July, and a China sliding toward deflation is, over time, a disinflationary force on Australian prices through commodities and the terms of trade, not an inflationary one. So the RBA is bracing against an oil-price upside while the largest buyer of its iron ore drifts toward falling prices at home. It has chosen which of those two forces to fear, and it has chosen the one its peers just stopped fearing.

The read: the Fed looked at oil and the labour market and picked the labour market. The RBA is looking at oil and China and has picked oil. One of these central banks is fighting last quarter's war, and we will find out which by Christmas.

The week ahead

• Australia's labour force and wage figures: the jobs market and pay growth are what keep services inflation sticky. A soft print would be the first real card the doves have held all year.
• The minutes of the August meeting: whether "a hike was considered" was one hawk's line for the record or a Board that is genuinely a bad inflation print away from moving.
• China's July activity data and the yuan: deeper Chinese deflation widens the terms-of-trade drag on Australia, pulling straight against the oil-upside case the RBA just made.