What Will the RBA do Now?

0 542

Tomorrow we have the most important event of the economic calendar for the whole month: the RBA’s interest rate decision. There are several reasons why it could provide some extra volatility.

After two back-to-back cuts in the rate, a third is unlikely at this point. But the bank far from shut the door on further moves in the short term.

We’ll be especially interested this time around in how the RBA perceives the economy and market’s reaction to their moves. We are only now getting the first bouts of data that which the cuts could have influenced. So, there is plenty of reason for the bank to hold steady until they get a full set of data.

Trading the news requires access to extensive market research - and that's what we do best. Open your Orbex account now.

What We Are Looking For

The expectations are for the RBA to keep the rates as they are. Where there might be some tweaking is in the language of the statement. There is no press conference scheduled for after the meeting, which is usually a sign that no action will be taken.

That leaves us with potential changes to the monetary policy statement and guidance. It’s hard to think of a more dovish statement than what they said last time around. This places the odds on the statement remaining the same. And that is simply because there isn’t a more explicit way of saying that interest rates will remain low for a long time and that the bank is willing to make further cuts.

The Inflation Rate

The issue revolves around the disappointing inflation data published almost two weeks ago. Even though it came in above expectations, the consensus is that the increase was driven almost entirely by the rise in petrol prices and increasing import costs due to a weaker exchange rate.

Of course, only one month of that measure had the effect of just one cut by the RBA. It’s still possible that going forward, we could see inflation tick up. But, for now, the central bank doesn’t have any better data than it did when embarking on the two back-to-back cuts.

Expectations Are Ramping Up

Meanwhile, the market is pricing in further rate cuts in the near future. There is still a 10% chance of a rate cut tomorrow, but that bumps up to 80% chance by the end of the year. This would be followed by a further rate cut in the middle of next year.

The action taken by the Fed last week puts further pressure on the RBA to cut the rate, as well. Even though Powell was quite emphatic about there not being more easing in the near future, and the RBA is telegraphing further action, the yield differential is still closing.

More Cash

The RBA’s preferred measure of inflation, the trimmed-mean CPI, hasn’t been at the target level since early 2016. However, it spent all of last year within two decimals. That seemed to be comfortable enough for the bank before, and it’s only been two quarters that have shown a deviation from the target.

The question is whether the change in monetary policy translates into more cash becoming available in the economy, coupled with the effect of the tax cuts. Since we won’t get a CPI measurement for another three months, we should pay close attention to signs of consumer sentiment, such as retail sales and the trade balance. They could be strong movers of the market going forward.

Test your strategy on how the AUD will fare with Orbex - Open Your Account Now. 

START TRADING

or practice on DEMO ACCOUNT

Trading CFDs Involves high risk of loss