- Economists divided on RBA’s policy decision this week
- Forecasts point to a 25bps rate cut, expected to bring down interest rate from 1.50% to 1.25%
- Latest quarterly inflation data shows a QoQ increase of 0.40% or an annualized inflation rate of 1.0%
- RBA’s inflation target is at 1 – 2% as of May 2016’s Statement on Monetary Policy
- Governor Glenn Stevens will be holding his last monetary policy meeting in August, as he hands over the mantle to Dr. Philip Lowe (currently serving as Deputy Governor)
- RBA will release Statement on Monetary Policy on Friday, August 5
The Reserve Bank of Australia’s monetary policy meeting is due on Tuesday, August 2. Expectations going into the event show a finely divided consensus, but median forecasts point to a 25bps rate cut from the RBA this week. The main reasoning behind the rate cut comes from last week’s second quarter inflation data released by the Australian Bureau of Statistics.
The data showed that Australia’s consumer prices rose at a pace of 0.40%. This was slightly better than the first quarter inflation which was at -0.20%. After the release of the Q1 inflation data, the RBA was quick to act and cut interest rates by 25bps at the May policy meeting.
On a year over year basis, Australia’s consumer prices grew at a pace of 1.0% over the twelve months to the June quarter; this was slightly lower than the 1.30% increase in the March quarter. While the RBA had previously maintained a target inflation rate of 2 – 3%, in May, the RBA revised its inflation outlook and lowered it to 1 – 2% over 2016 and expect inflation to pick up to 1.5 – 2.5% towards the end. The RBA’s Statement on Monetary Policy in May said, “The broad-based nature of the weakness in non-tradables inflation and the fact that wage outcomes were lower than expected over 2015 has resulted in a reassessment of the extent of domestic inflationary pressures, leading to downward revisions to the forecasts for inflation and wage growth. Underlying inflation is now expected to remain around 1–2 percent over 2016 and to pick up to 1½–2½ percent at the end of the forecast period.”
With the annual inflation rate at 1.0% as of the latest print, it is very likely that the central bank will keep rates on hold at this meeting. According to the July 7 monetary policy meeting minutes from the RBA, the information showed that the board would assess more information and provide an update of the forecasts ahead of the August Statement on Monetary Policy, which is due for release on August 5, this Friday.
Governor Glenn Stevens will be chairing his last monetary policy meeting as he passes the baton to Dr. Philip Lowe who serves as a Deputy Governor on the RBA’s board. Unless the RBA’s forecasts on inflation deteriorate even further, it is unlikely to expect the RBA to cut rates at this week’s meeting. For the most part, Australia’s quarterly inflation has been stable after the initial dip in the first quarter.
Prashant Newnaha, a strategist at TD Securities says that the market expectations for RBA easing are little changed. “Indeed the minutes from the July meeting make it clear that there has been little data on the Australian economy since the last meeting. With inflation really the last piece of the jigsaw puzzle, and that piece coming in at expectations, this suggests the RBA keeps the cash rate on hold at 1.75% next week,” Newnaha said. The RBA rate indicator currently assigns a 68% probability for a rate cut to 1.50%, as of July 29, 2016.
Trading the RBA Rate Decision
The AUDNZD currency pair offers better prospects in terms of trading opportunities compared to the AUDUSD. The main driving factor in the AUDNZD is, of course, the interest rate expectations. The RBNZ is expected to cut rates at its meeting next week (10/08/2016). While the New Zealand dollar fell steadily a week ago, last week, the Kiwi managed to recover some of its losses. Still, the NZD looks to be on slippery ground.
The AUDNZD is currently in the process of changing its trend after prices fell steadily since March this year from the highs of 1.1295, to hit a low near 1.0375 in early July. Support is being tested at the previous resistance of 1.0533 with the possibility of a decline to 1.045. The bias remains to the upside as long as this support zone holds up with the resistance to the upside coming in at 1.1039.
