Tomorrow the RBA has a big decision to make — one more rate rise for the road or a pause because we don’t want to create a recession! And this isn’t just a feeling thing about our economic future, as there are numbers indicating recession fears shouldn’t be totally ignored.

Following a better-than-expected drop in inflation from 7% to 6% (with the monthly rise only 0.8%, which annualizes out at 3.2%, and with a 0.8% fall in retail in June), the bond market has reduced its bets on a rate rise tomorrow.

Economists who comprehend the technically tricky world of bonds say these professional interest rate watches think there’s a 24% chance of a rise tomorrow, which means there’s a 76% chance of another pause.

In contrast, the big banks have been raising fixed rates, which is the kind of thing banks do near the top of the cycle to trap scared borrowers, whose biggest fears really should being trapped in a high 3-year fixed rate loan when rates are falling.

Canstar group executive Steve Mickenbecker told the SMH that the case for falling interest rates (and therefore falling fixed rates) was weak.

“I can’t see a fall in long-term rates any time soon because the expectation is that there’ll be a pretty soft landing, which means there won’t be a strong case for early easing of interest rates,” he said.

Note he said any time soon, but that doesn’t mean rates won’t fall next year. I’d be very careful of being a borrower who locks in for any longer than a year, especially if those economists who think a recession is possible down the track are on the money. Be certain on this: if the RBA’s cash rate rise from 0.1% to 4.1% in just over a year causes me to drag out the R-word, interest rates will be cut by the new RBA governor Michele Bullock.

AMP’s Shane Oliver has told the SMH’s Shayne Wright that data is saying we should be wary about too many rate rises causing a recession.

“The RBA is now getting what it wanted on inflation and the ongoing weakness in real retail sales highlights the high and increasing risk that it will knock the economy unnecessarily into recession if it keeps tightening,” he said. “That said, it is a close call and given the RBA’s concerns about services inflation and wages it wouldn’t be a surprise to see the RBA hike by another 0.25 per cent.”

On the possibility of a recession, remember the Gross Domestic Product (GDP) reading for the March quarter was 0.2% and a technical recession is two quarters of negative growth, so the recent fall in inflation could be telling us something about future economic growth and it’s nothing too bullish!

But let me be clear, what the RBA board must work out isn’t easy because unemployment remains low at 3.5% and services inflation is up by 6.3% over the past 12 months. However, this is probably being driven by over 55s, who have increased their spending, the CBA says, while younger Aussies have been cutting back big time.

Rate rises on the mortgage belt will do that and economists say more spending cutbacks are coming

Wright reports that “St George Bank economists estimate that real per person spending fell in both the December and March quarters, and last week’s poor retail trade figures suggest this had continued into the June quarter.”

They added: “Real per capita consumption contracted over the December and March quarters. The retail spending data, which accounts for around a third of household consumption, suggests the contraction likely extended to the June quarter.”

The RBA gets a chance to see the latest readings for lending, building approvals and house prices tomorrow (Tuesday) before their 2.30pm rates decision, but I think there’s enough data out there already that says another pause would be a good idea, especially if it helps us avoid a recession.