KEY POINTS:
The market was not expecting the bank to raise the official cash rate and it hasn't, but the accompanying statement is so hawkish and stern, that you wonder why it hasn't.
It says the medium term inflation risks have increased since its September statement and accordingly that there is an increased risk that some further increase in interest rates may be required.
It cites the surprising resilience of household spending based in turn on the labour market - which remains very strong despite some loss of jobs lately - and the signs of increased momentum in the housing market.
But what is striking is the bank has added a new factor to the danger list, the risk fiscal policy will be more stimulatory than it already expects.
Fiscal policy is the net effect of how much money the Government takes out of the economy through tax and how much it puts back through spending.
It is already expected to provide a decent boost to economic activity, next year especially, but tax cuts and increased spending could rev that up more.
Normally the bank is pretty coy in what it says about fiscal risk, so it's telling that it has given the politicians of both main parties so explicit a warning to go easy.
The bank says it continues to expect consumption to slow fairly rapidly as consumers become more aware of their debt levels in the context of a softening housing market.
Generally the monetary policy statement paints a picture of an economy which has bottomed out in terms of growth, but which will trudge along at a below average rate for another couple of years allowing that the persistent inflation pressure that has built up to slowly unwind.
The risk is that is too slowly for the bank's liking.
"With the short term [growth] outlook looking stronger further monetary policy restraint may be needed to achieve that unwinding" it said.
In the short-term, headline inflation will benefit from the drop in oil prices, falling back below three per cent before the end of this year and a low of two per cent in the middle of next year.
That will help reduce inflation expectations and wage rises down the track, but it masks what is only a very slow decline in non-tradeables inflation, prices in those parts of the economy not affected by the exchange rate and not disciplined by international prices.
Non-tradeables inflation has been around 4 per cent for a couple of years and the bank's projections only have it easing back to three per cent over the next two years.
* For full analysis of the Reserve Bank's monetary policy statement see Brian Fallow's report in tomorrow's Business Herald.
