Well, the chances of a Reserve Bank rate rise are non-existent, while the chances of a rate cut are growing, despite another round of opportunistic rate rises from our now dominant banks and expectations of a high inflation reading when the June quarter Consumer Price Index is released next week.
The release of the July 1 board meeting minutes yesterday makes it clear that a rate rise in not in the bank's thinking and not even a forecast 1% or more rise in next Wednesday's June quarter Consumer Price Index will make the bank change its approach.
The bank's minutes were released on a day when the stockmarket here tanked, and those in Asia weren't far behind, especially Hong Kong and China.
At the close, ASX200 index was off 105.3 points, or 2.1% at 4815.7, its lowest close in nearly 30 months; the fall equates to another more than $20 billion being wiped off the market's value and brought the losses in this year to 24%.
The broader All Ordinaries dropped 97.8 points, or 2%, to 4910.1 and the Australian dollar charged on towards parity with the US as it hit 97.80 US cents in late trading in Asia.
That rising value of the dollar is dampening the inflationary impact of the high oil and petrol prices, a small mercy for consumers and the economy as activity slows.
Even with the stronger dollar, the RBA is clearly expecting a big CPI figure, and has forecast that higher petrol prices will add 0.25% to that outcome and to the September quarter's CPI, but it can't see a reason to lift rates, or even warn in its usual veiled fashion.
You see the RBA is becoming a bit worried about the health and strength of the economy, thanks to the instability offshore, the stockmarket slump, rising inflation, high oil and petrol prices and the impact of its rate rises (four since last August) and those extra ones from the banks.
The oil and petrol price rises are acting like extra rate rises: including the extras from the banks, interest rates are now up more than 1.50% since last August. That is a significant tightening. Throw in the higher oil prices and the impact could be more like 2% or more of rate rises.
The bank dropped its rate rise big stick in June when it realised that there had been more rate increases than its 1% of increases since last August, and that rising oil and petrol prices were having an impact similar to further rate rises.
That showed up in specific references to the impact of rising oil prices in the July 1 post meeting statement from RBA Governor, Glenn Stevens.
And events since that meeting, especially the worsening in financial conditions in global credit markets, a further contraction in bank lending in the US, Europe, UK and now Australia in May, plus continuing high petrol and oil prices means that any fears about inflation rising further are being outweighed by questions about whether current monetary policy is too tight.
Don't expect a rate cut next month or in September, but 0.25% off the 7.25% cash rate by year's end wouldn't surprise.
Bank lending here has slowed dramatically, despite the latest round of opportunistic rate rises from the banks, who all blamed for higher funding costs from the wholesale markets.
The rate rises came despite falling lending and consumer sentiment which has worsened in the past month, as have business confidence and conditions. They are at a level last seen on some measures, at the end of the 1991-92 recession. Bank lending in May had its biggest fall since 1992 as well, and yet the banks lifted rates.
In fact the RBA took a poke at the banks' subsequent rate rises. Westpac joined the queue yesterday with a 0.14% increase in its home loan rate from tomorrow.
The minutes show the board discussed the way the Australian banks had been funding themselves in recent months.
"Members noted that the continued strong pace of bond issuance by Australian banks meant that they were funding beyond current needs and for next year," the minutes said.
"The maturities of new bond issuance had lengthened and there were indications that spreads at issuance were now starting to narrow."
"Over the past month, there had been signs that conditions in the domestic residential mortgage-backed securities market had improved further, with new issues at lower cost than those earlier in the year. Mortgage-backed securities markets in other economies had remained very subdued so far this year," the board said.
That would indicate that the banks are not paying more for their money domestically and they are having no great worry in borrowing for longer and into 2009. Perhaps the banks are being forced to pay more on the bonds they have issued overseas? Or is it a lack of competition.
"Members concurred that the evidence becoming available in the latest month had added weight to the view that the current stance of policy, in conjunction with the more general tightening in financial conditions that had occurred since the middle of last year and most recently the additional rise in fuel costs, were working to restrain demand.
"Consumer spending had slowed significantly and there had been a marked decline in the growth of credit to both households and businesses.
"Surveys indicated that confidence had fallen further over the past month and asset prices were weakening. In addition, there were some early signs of softening in labour market conditions. The deterioration in conditions in financial markets over the past month had probably tightened financial conditions a little further."
That's the bank saying, in its own fashion, that there's no need for any more rate rises, and there's the hint of a look at whether a rate cut might happen a little way down the track.
But the most interesting comments were on the impact of oil and petrol prices on inflation.
Petrol prices are still high (oil is above $US145 a barrel) and the RBA says in the minutes of the July 1 meeting, that they will contribute to a 1% plus estimated rise in the Consumer Price Index for the June quarter, when it is released a week tomorrow.
"The increase in the retail petrol price in the past few months had been significant and, if it remained at current levels, was expected to make a contribution to CPI inflation of at least ¼ percentage point in each of the June and September quarters," the RBA said.
"Members were informed that, apart from the near-term effect on the headline CPI of higher petrol prices, there had been no material change in the inflation outlook. The June quarter CPI, which would be released before the next meeting, was expected to show inflation of over 1 per cent in the quarter."
That explains the explicit reference in the July 1 statement to the impact of oil prices.
That seemed to suggest that the RBA was viewing the rising oil and petrol prices like additional rate rises.
That's why the bank is now starting to wonder about when to cut rates.
Its staff will prepare a new set of economic and inflation forecasts after the CPI to be released in the third monetary policy statement of the year in August.
We should have a better idea by then. But next week's CPI rise of more than 1% won't cause the bank to lift rates; far from it, it could convince them that a rate cut might now be possible later in the year.
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