In a statement released by bank governor Glenn Stevens following the rate decision, the bank said, "Indicators of household spending have recorded subdued outcomes over recent months, and credit expansion to both households and businesses has weakened significantly. There have also been some tentative signs of an easing in labour market conditions."

Joshua Williamson, senior strategist at TD Securities in Sydney, said the sentence adds some signs of downside labour market risk, such as income and employment growth risk, to the ongoing concerns about credit growth and "shows that the pendulum is swinging in favour of weakening economic conditions rather than lagged inflation."

He noted that while there were concerns about inflation from the jump in oil prices, they were tempered somewhat by the acknowledgement that rising fuel costs will work to also constrain demand.

"The statement was also telling for what was missing," Williamson noted. "Gone was the reference in the June Statement to 'Should demand not slow as expected, or should expectations of high ongoing inflation begin to affect wage and price setting, that outlook would need to be reviewed'. The removal of this previous concern shows that the RBA has enough evidence to feel more confident that economic activity will slow and with it inflation."

The market clearly interpreted the statement as being more dovish, as the Australian dollar dropped to a low of 0.9535 shortly after the release, from 0.9585 just prior to the release. The AUD was also down on the crosses with "risk aversion still prevalent throughout currency markets," economists from Westpac noted.

"The market interpreted the statement as more dovish due to the references to the recent weakness in the labour market and that the recent flow of information had given the central bank greater confidence that the slowdown in demand would lead to a decline in the pace of inflation," they wrote in a research note.

Sue Trinh, a senior currency strategist at RBC FX Strategy, added that the RBA has "bought itself some inflation headroom" by acknowledging that inflation is likely to remain relatively high in the short term, and that the CPI will be boosted further in coming quarters by the recent rises in global oil prices.

Also in the RBA's statement, it was noted that the current stance of monetary policy remains "appropriate".

"The Board will continue to evaluate prospects for economic activity and inflation in the light of new information," the statement read.

By Stephen Huebl, This email address is being protected from spam bots, you need Javascript enabled to view it

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