What a fix the Reserve Bank is in: presiding over the unlikely duo of worsening  unemployment and rising interest rates; talking up the economy just as employment starts to fall.

It's going to be a curious board meeting tomorrow.

Having spruiked ''substantial growth around the end of the year'' in the minutes of last month's meeting, the RBA has effectively backed itself into a corner of leaving its official cash rate unchanged despite the official belief of both Treasury and the RBA that the number of unemployed is set to jump by 55 per cent over the next year.

And the RBA is sitting on its monetary policy hands while the Big Four banks are lifting interest rates, looking for further increases in the fattening net interest margins they're enjoying, squeezing the life out of the non-residential property sector and running a mile from residential developers as well - and thus holding at bay the home building that will eventually play a major role in Australia's recovery from recession.

The global bond markets' concerns about the amount of government debt being issued are genuine and, yes, that adds to the cost of Australian banks' longer-term funding at present. But you might notice the banks aren't being nearly as vocal about the dive in LIBOR rates and the margins they might pay over the London benchmark lending rate.

It's beginning to look a bit like ''heads I win, tails you lose'' with the local money lending cartel. Their cost of short-term funds has plunged, but they're hanging on to that while jacking up fixed-term loans to more than compensate for uncertainties in the bond market.

The increase in fixed-term rates over the past few weeks is even starting to look like a neat marketing ploy: quick, fix your loan before rates jump - and lock yourself in with us in the process. As if competition hasn't already been reduced enough.

Right now Australia is particularly blessed to have 40 per cent of the world's AA-rated banks, but you don't have to look very far down the track to see a policy challenge for both the government and RBA in the lack of banking choice. The foreign banks have been pretty much blown away and the small local alternatives are struggling for air, never mind capital.

Bamboo shoots

Which brings us back to the RBA's dilemma. Asia' green bamboo shoots represent one half of Australia's recovery from the recession that becomes official on Wednesday. That half rests on the fact that the commodities boom is not dead, only the bubble has been destroyed.

The other half could be the revival of investment in home building, as opposed to mere spending on existing residential real estate. As I've written before, we have had an extraordinary five years with negligible growth in dwelling investment and Treasury's budget papers forecast another two years of the same -  seven roughly static years despite record population growth.

It has the makings of another bubble in it, just the sort of thing central bankers around the world are now looking for ways of mitigating.

The policy challenge to minimise unemployment is to find a way of making credit available to residential developers, both tract housing and medium density, and boost new public housing beyond Canberra's pre-recession initiatives.

The misnamed first-home owner schemes are an inefficient way of doing it - the government money being effectively capitalised by grateful vendors.

As the game stands, a developer walking into a bank is about as popular as a sneeze on a cruise ship.

Cuts to come

Somewhere in the policy mix will be further interest rate cuts by the RBA. Not tomorrow, but soon enough when the unemployment rate begins to show some serious movement, the Martin Place mandarins will need to be seen to act.

For now, the reality beyond various empathetic newspaper headlines and individual crises is that the labor market remains relatively strong. At 5.5 per cent (the more reliable trend series statistic no-one seems to use), unemployment hasn't risen much from its recent multi-generational lows.

The number of people with jobs has been more-or-less flat since August and there's plenty of anecdotal evidence that employers are trying hard not to shed labor that was so hard to find just a few months ago.

But the official family tells us that that is likely to change in the second half of this year.

The RBA has two clear responsibilities - to keep inflation and unemployment down. They are often conflicting interests, but the present situation of falling inflation, rising unemployment and rising interest rates is a bigger conflict.

Michael Pascoe is a BusinessDay contributing editor.