The announcement of no rate rate hike - for now - sent the dollar plummeting almost one US cent from US 96.70 to US 95.80.
But the futures market took the Reserve Bank at its word and factored in a one-third chance of a rate rise at the Bank's next board meeting Melbourne Cup Day and a near certainty of a rate hike by March.
"We see it as a temporary reprieve," said National Australia Bank economist Alan Oster. "We see the cash rate climbing from its present 4.5 per cent to 5.5 per cent by mid next year. We expect a pre-Christmas hike."
An increase in the cash rate to 5.5 per cent would push up standard variable mortgage rates to around 8.4 per cent if no more than fully passed on.
It would add $200 to the monthly cost of servicing a $300,000 mortgage and push the cost of servicing a $400,000 mortgage above $3000 per month for the first time since the financial crisis...
Discussion at the Sydney board meeting centred around the timing of the next rate rise rather than the need for one. Reserve Bank forecasts have Australia's underlying inflation rate climbing to the top of the Reserve Bank's target band within 20 months.
The board reached the view that for the moment inflation remained contained at 2.75 per cent and should stay contained "in the near term".
Credit growth was "quite subdued" and asset prices were "not moving notably in either direction".
The Bank's statement pointed to a moderation in global growth but to a large rise in export prices "now boosting national income very substantially".
"Form here on we are on data watch," said ICAP Securities economist Adam Carr. "If the next inflation figures are high and Australian and United States data are strong I reckon a hike in November is a better than even bet."
Acting Prime Minister Wayne Swan welcomed the reprieve as a "relief for families sitting around the kitchen table, doing their best to make their household budget add up from month to month".
Shadow Treasurer Joe Hockey said the Bank had handed Mr Swan a "get out of jail free" card, but that next time he would not be so lucky.
"The Bank in its final line of its statement warned that interest rates will be going up. It is rare for a government to get an early warning message, but this government has received one from the Reserve Bank."
"The message is: start slashing your spending now and start undertaking the reform needed to prevent further pressure on rates."
In fact the statement issued after the board meeting made no mention of government spending other than to say it had been "prominent" in supporting the economy but that its impact was "now lessening".
Separately released figures showed retail spending barely climbing in the year to August with total spending up 3.8 per cent but spending excluding restaurants and takeaway food up just 2 per cent.
Published in today's SMH and Age
5 October 2010
Statement by Glenn Stevens, Governor: Monetary Policy Decision
At its meeting today, the Board decided to leave the cash rate unchanged at 4.5 per cent.
The global economy grew faster than trend over the year to mid 2010, but will probably ease back to about trend pace over the coming year. Recent information is consistent with a more sustainable, but still strong, pace of growth in China and most of the Asian region. In Europe and the United States, growth prospects appear to be modest in the near term, a legacy of the financial crisis and its impact on private and public finances. Financial markets are still characterised by a degree of uncertainty, and are responding both to differences in growth outlooks between regions and evident strains on public finances and banking systems in several smaller countries in Europe. Most commodity prices have changed little over recent months, and those most important to Australia remain very high.
Information on the Australian economy shows growth around trend over the past year. Public spending was prominent in driving aggregate demand for several quarters but this impact is now lessening, while the prospects for private demand, and in particular business investment, have been improving. This is to be expected given the large rise in Australia’s terms of trade, which is now boosting national income very substantially.
Asset values are not moving notably in either direction, and overall credit growth is quite subdued at this stage, notwithstanding evidence of some greater willingness to lend. Inflation has moderated from the excessive pace of 2008. The effects of the rise in tobacco taxes aside, CPI inflation has been running at around 2¾ per cent over the past year. That looks likely to continue in the near term.
The current stance of monetary policy is delivering interest rates to borrowers close to their average of the past decade. The Board regards this as appropriate for the time being. If economic conditions evolve as the Board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target.
. Something is happening here but you don't know what it is, do you Mr Jones?
. Reserve: If you haven't got the message, we'll help you join the dots
. Governor Stevens pwned!