After last week’s surprisingly poor inflation numbers there was a chorus of voices calling for an increase in official interest rates and the dollar spiked as investors bet that there would be one. The Reserve Bank, however, has taken a more sophisticated approach.

One unexpectedly strong set of inflation numbers would never have provided a sound basis for raising rates when there are plenty of other indicators, some objective and some anecdotal, that there are large parts of the economy under real pressure and that business and consumer confidence are fragile and still waning.

With Europe still teetering on the brink of a new sovereign debt-inspired crisis, the US only just avoiding one of its own politicians’ making and both major economies at risk of sliding back towards recession, it would have made even less sense to rush to raise rates here.

It is apparent from Glenn Stevens’ statement yesterday that the offshore developments are giving the bank pause for thought.

Where last month the RBA noted a slowing in the rate of growth in the global economy, this month it noted a lack of clarity about the persistence of the slowdown. It also noted that downside risks had increased as concerns had grown over the outlook for public finances in Europe and the US.

Within the domestic economy, Stevens referred — as he did last month — to cautious behaviour by households and the strong dollar having a strong dampening effect. Where last month the statement referred to modest credit growth, it was now declining to levels very subdued by historical standards despite the increased willingness of institutions to lend. The strength of the dollar was specifically noted.

The bank isn’t dismissing the June quarter inflation results as an aberration just yet. Stevens said that year-end inflation was high but had been affected by the extreme weather events earlier in the year and that as the effects of those events reversed over the next six months, CPI inflation should decline.

“But measures that give a better indication of the trend in inflation have begun to rise over the past six months after declining for the previous two years. While they have, to date, remained consistent with the two to three per cent target on a year-ended basis, the board remains concerned about the medium term outlook for inflation,” he said.

He went onto to say that it was appropriate in those circumstances for monetary policy to exert a “degree of restraint” and said most indicators suggested that “as a result of the board’s decisions last year” it was doing so.

In fact most retailers would say that the final rate rise last year — the November increase — was the one rate rise too many and the one that punctured consumer and small business confidence. It hasn’t helped that the value of household assets including, critically, houses, has been sliding this year or that the strong dollar has been imposing rising pressure on domestic businesses.

It is, however, apparent from the reference in the final paragraph of the statement to the “acute sense of uncertainty in global financial markets over recent weeks” that it is the offshore environment that is troubling the bank most.

The Goldman Sachs economics team issued some research yesterday that noted that where, for more than two years, the confidence of Australian consumers was much higher than global consumers, it had fallen so far in the past month that it was only just above the levels of North Atlantic consumers and that business confidence was actually well below global business confidence.

They argue that while the contentious debates about the carbon tax and other policies might be part of the explanation there is also an alignment (temporarily interrupted by the Rudd government’s response to the financial crisis) between domestic and global business and consumer confidence cycles.

“That is, the transmission mechanism from an external economic shock to local is still largely a function of expectations and asset price movements and from Australia’s perspective both of these key variables are flashing a warning signal for policymakers,” the analysts said.

One might add that the recent experience of the GFC and its impact on asset prices and the price and availability of credit would have reinforced those global-local linkages deeply in the memories and mindsets of consumers and businesses, which is why households are deleveraging and saving at record rates and why businesses generally aren’t borrowing to expand but are in defence mode.

The complicating factor is the boom in resources and resource investment but its impact on employment and employment costs in a tight labour market and on the dollar is a negative for much of the rest of the economy and simply adds to the sense of a volatile and risk-laden economic environment. The unstable and unpredictable politics, policies and behaviours in Canberra, of course, don’t help.

The RBA’s central responsibility is to keep the price of money stable, which it has done very effectively for quite some time. Without clear evidence that underlying inflation is starting to develop some momentum, however, it would risk doing real damage to the now obviously fragile non-resource sectors of the economy if it raised rates any time soon.

It would appear it is now somewhat more conscious of that risk than it has been since it started the rate-raising cycle nearly two years ago.

*This first appeared on Business Spectator.