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Click to play video Return to video Video feedback Use this form to: Ask for technichal assistance in playing the multimedia available on this site, or Provide feedback to the multimedia producers. Return to video Video feedback Thank you. Your feedback was successfully sent. Video will begin in 5 seconds. Don't play Play now More video Recommended Click to play video The week that was Michael Pascoe Click to play video Papademos to lead Greece Click to play video France, Germany discuss radical EU overhaul Click to play video Europe woes reverberate down under Replay video Return to video Video settings What type of connection do you have? Return to video Video settings Your video format settings have been saved. Parity prompts revised rates outlook Some analysts predict the Reserve Bank will leave interest rates on hold with the Aussie dollar reaching parity. Commonwealth Bank disagrees. Video feedback Video settings The markets were primed for an interest rate rise this month. Paul Bloxham, a former central banker, explains how they got it wrong. Last week's decision by the Reserve Bank not to raise interest rates surprised many people. Most commentators were convinced an interest rate rise was a certainty. So what happened? For me, two factors were at play. The first was communication (or the lack thereof) and the second was a misunderstanding in some quarters about how the Reserve Bank makes its monetary policy decisions. In this case, the communication element was a speech by the Reserve Bank governor on September 20 suggesting that next year's growth would likely be ''above trend'' and inflation would remain elevated. In essence, he was flagging that the next move in rates was likely to be up (not down as markets had priced in only two weeks previously). The Rosetta Stone Arabic next day the Reserve Bank board minutes from the September meeting suggested that higher interest rates would probably be required ''at some point''. As always, there were no allusions to the timing of any rate moves. Advertisement: Story continues below This seemed consistent with the Reserve Bank's broader communication strategy which, for better or worse, never specifically articulates a path for interest rates. Even when the bank publishes forecasts in the quarterly Statement of Monetary Policy there is a degree of ambiguity. The forecasts assume that the cash rate ''moves broadly in line with market expectations'' and they warn that this ''does not represent a commitment by the board to any particular path for policy''. The governor's speech was, however, taken by many to suggest that the Reserve Bank would definitely move in October. Some even thought that the use of specific language in these publications was a coded signal. The claim was that in the past when the Reserve Bank had stated that monetary policy was appropriate ''for the time being'' - as it once again did in the September minutes - that it had always moved rates the next month. In my view the bank does not draft in this way, preferring instead to have a flexible vocabulary for describing events. In any case, the Reserve Bank does not make its decisions well in advance. On the contrary, because it is often a finely balanced decision, a recommendation is only drafted five days before a board meeting and it is not until the actual meeting that the final decision is made. No one can know with certainty what is going to happen two weeks in advance. Meanwhile, others seemed to argue that the Reserve Bank would lift rates in order to get them up before a potentially ''inconveniently'' low result for the September quarter consumer price index was published on October 27. I would argue that this reasoning is unsound. If the CPI prints lower than expected, the Reserve Bank is likely to take it as a signal that the inflationary impulse in the economy is more benign than expected and that it has more time before needing to move rates.

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