Here's a super-simple guide to what might push the RBA to cut interest rates

Construction activity in western Sydney. Picture: Getty Images

For a few moments yesterday, markets didn’t know what to make of the RBA’s monthly statement on interest rates. After the low inflation data of last week many in the market expected the RBA to cut, and it didn’t.

First the ASX tanked, then recovered:

It was the same with the dollar, which dived before rallying.

What gives?

Traders normally go to the very end of the statement to judge whether the RBA is dovish or hawkish on rates.

The very last sentence said that “the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.”

In the normal run of things this would indicate that rate cuts are firmly on the table.

But the previous sentence said that “the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate at this meeting.”

In a note to clients, Deutsche Bank explained:

Put simply – and as we noted after the CPI – the low inflation print gave the Bank scope to ease policy if they wanted. The real question was always whether or not they needed to. Here it appears that the Bank is seeing some of the same things we are, such as: the stability in the unemployment rate over the past year; and the lift in business conditions.

A persistent theme in the Australian economy in the past six months has been the improvement in business conditions and continuous jobs growth. Concerns from mid-year that something nasty was looming in China, Australia’s largest trading partner, have receded. Australia’s huge tourism sector, thanks to the lower dollar, is booming.

And we’re not talking about mere green shoots: companies have “exceptionally healthy” cash flows and conditions, as reported in the benchmark NAB survey, are at their highest level since the GFC. Add in the Malcolm Turnbull effect on consumer confidence and you’ve got an economy that doesn’t need more heat added to it right now.

Many economists still expect a cut in December or possibly February. Deutsche isn’t so sure and offers this simple, one-sentence explanation for what to watch:

Given today’s statement from the RBA, it appears that getting a rate cut over the next three or so months relies on a turn lower across the activity side of the economy (i.e. labour market / business conditions) and a further cooling house in house price growth across Sydney and Melbourne.

Simple.

Retail sales data is out today at 11.30am and we get the employment numbers next week. We’ll be covering it all in detail as it happens.

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.