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The European debt crisis is worsening, while underlying inflation looks likely to increase - leaving the RBA between a rock and a hard place
The deteriotating conditions abroad and a general slump in confidence forced the RBA to keep rates on hold at 4.5 per cent for the second consecutive month in July.
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While the government remains adamant that Australia is in the "best position" to weather the debt crisis gripping Europe, it appears consumers feel otherwise.
The Westpac-Melbourne Institute consumer sentiment index dropped 5.7 per cent in June - following a 7.0 per cent drop in May.
This fall in sentiment was reflected in consumer sales, which recorded just 0.2 per cent growth in May.
According to the Australian Bureau of Statistics (ABS), retail turnover grew 0.6 per cent in the 12 months to May 2010, indicating that Australians are still reluctant to spend.
In the coming months, the RBA will also be mindful of the effects of a slowing property market and declining lending volumes. While keeping the housing market in check is essential, the RBA will want to avoid a housing slump and so it will closely monitor the impact of interest rates on borrowers.
The latest ABS data shows demand for owner occupier housing remains weak and suggests investors are now the only source of growth in the housing market.
The number of new mortgages taken out in May dropped 0.7 per cent, or 26.9 per cent below the peak achieved last September.
The end of the first home owner's boosted grant accounted for much of this fall. And while investors are managing to fill some of this gap - lifting their borrowing by 2.6 per cent in May - they still represent a relatively small portion of the market.
But it is not all bad news. The mining sector is surging, as is the Australian job market.
The unemployment rate of 5.1 per cent - the lowest level since January 2009 - was steady on a revised May figure, but was down on the original 5.2 per cent calculation and lower than economists' forecasts of 5.2 per cent.
Employers added 45,700 jobs throughout June in total, easily beating estimates for growth of 15,000.
The rapid growth may put pressure on the RBA to resume raising rates however.
Whether or not the RBA lifts again in the third quarter is now solely dependent on the inflation outlook.
