Forex Trading Library

RBA to hike, or not?

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There is considerable uncertainty around what the RBA will do when it meets later today (or early tomorrow, depending on your time zone). Part of this is due to signals being given by officials seemingly contradicting the data that has been coming out recently. Even the surveys of economists point in different directions.

A slight majority of international economists polled by Reuters expect a rate hike, following the latest inflation data. But a slight majority of Australian economists polled by Finder suggest that the RBA will hold rates steady pointing to lagging economic indicators. The market, in turn, appears to be pricing in a 56% chance of a rate hike. Meaning there is likely to be a reaction in the currency pair either way, with potentially a bigger reaction if there is a hold, as that would be a larger surprise.

The RBA-data disconnect

Just last week, RBA Governor Lowe insisted that the bank is very much in data-dependent mode. The focus is on labor unit costs. That would be in line with what is expected from a central bank in the current circumstances. He also reiterated that the bank will do whatever it takes to bring down inflation, saying that the inflation rate has to come down to target by 2025.

But he also said that monetary policy is in restrictive territory, a view seemingly shared by several other members of the Board. He also clarified that nominal wage growth isn’t a problem, highlighting that productivity is a problem. Meanwhile, the latest inflation report shows that prices continue to rise at a faster rate than expected. April CPI jumped to 6.8% compared to 6.4% expected, which was already an increase from the 6.3% prior.

Wages are going up

Meanwhile, the Australian government just raised the minimum wage by 5.25%, more than expected. That isn’t as much as the inflation rate is, but the Australian Financial Review concluded that the increased pressure on costs from raising the minimum wage made it almost certain that the RBA will hike.

Meanwhile April unemployment jumped to 3.7%, the highest rate this year as Australian employers dismissed more people than they hired. The quarterly wage price index grew by 3.7% compared to the prior year, which is the fastest pace since the third quarter of 2012. Meanwhile consumers are not increasing buying, raising worries of a stagnating economy while inflation is still rising.

A mistake or a correction?

The RBA’s decision to hold rates, followed by an increase in inflation have made some economists wonder if the bank made a mistake. The lack of conviction in the market that the RBA would bring inflation down might be pushing prices higher, and might force the RBA to take even stronger action. On the other hand, the RBA keeps insisting that rates are already restrictive, meaning that Board members will be looking for any opportunity to bring down rates to support the economy.

Australia’s sluggish economic growth, in line with slow activity in its largest trade partner, China, can be a major challenge for the RBA. Which means it might opt to split the difference, instead of hiking or pausing. A 15bps hike is one option to both combat inflation but not signal that hurting the economy is on the docket.

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