Lets not be deluded by simplistic explanation of how the RBA can freely lift and drop rates. The decision is largely dictated by external factors and the hard cold fact that our boom-bust cycle is out-of-sync with the rest of the world.
Despite having a "relatively" tiny population the AUD is the 5th most traded currecy in the world. Most of it is held by foreigners who will dump it at will at any sign of reversal of fortune in Australia's economy.
If the RBA cuts rates the moment the US Fed hikes, the AUD will be heading towards 60 US cents as the carry trade unwinds violently. Any body who has invested in Aussie property from overseas will immediately dump their assets as the value of their properties will instantly fall by 25% + (even if one is fool hardy enough to believe that we are not at the threshold of a house price crash). With a crash on the cards (conservatively say at 40% over the next 2 years), those overseas investors will lose upward of 60% of their investment.
With oil at $100 barrel (now $80 and the trend is on the up and up as global demand rises emerging from the GFC), then a litre of petrol at the pump will be back to $1.70 a litre in a flash.
All the knick knacks and electrical applicances from China will go up in price driving up "imported inflation". As the AUD tanks, exporters will reap a bonus (at the expense of local consumers who have to pay a premium on consumerables). When that happens both headline and core inflation is out of control and the RBA is literally stuffed.
With the RBA's hands tied, rates goes up regardless of economic contraction and unemployment. If it cuts rates, the AUD will head toward the US fifties cents range.
If one has any sense, one should (rather than admire the resilience of the Oz housing market in a world of housing rubble) see it sticking out like a very large sore thumb.
Anyone ever watched a Road-Runner cartoon where everything crashes down leaving the tallest structure standing. Then everyone freezes and uniformly roll their eyes nervously towards it when the faintest creaks begins.
