The Reserve Bank of Australia (RBA) announced today that its policy rate would stay unchanged at 4.5 per cent. It means that the policy rates have been on hold since May after the tightening cycle began in October 2009 and led to 6 rises. The RBA has clearly been looking out the window. It is seeing the Eurozone deteriorating further as the fiscal austerity bites. The UK is now slowing and likely to head back into recession courtesy of the vandalism of its government which thinks it has run out of money. And the US economy is slowing again as its dysfunctional political system is demonstrating it is incapable of maintaining spending growth at levels sufficient to reduce its obscenely high unemployment. Deflation is the threat now. In terms of the local economy there are conflicting tendencies. Private spending remains flat and the fiscal stimulus is waning. Parts of the economy are buoyant as a result of the boom in primary commodity demand (from Asia). The labour market is also still fairly fragile with 13 per cent of our labour resources idle (unemployed or underemployed). Further, inflation is stable in Australia. So it is hardly time to be increasing interest rates. But try telling that to the bank economists who mostly predicted a rise today. They were wrong. They often are. That is no surprise given the narrow way they think about the economy. The RBA made the correct decision today.