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Close Call on the RBA Rate Decision

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The RBA might or might not raise rates by 25bps later tonight when it meets, depending on who you ask. This could set up some significant market fluctuations, since traders aren’t dialed into the results. Either way it goes, it could still count as the second surprise in a row, after the hike last week.

This decision is also likely to get extra global scrutiny, since it’s the first of this cycle in which there is considerable doubt about other rate hikes. Some currencies are in a similar position to the Aussie, such as the Canadian dollar. CAD traders might be looking at this decision for clues as to what the BOC does, since both central banks surprised last time around. Naturally the Kiwi dollar will be in focus to potentially react to the RBA decision as well.

What could happen?

According to a poll of international economists conducted by Reuters last week, there is a minor consensus in favor of a rate hike. 52% of economists in that poll predict a rate hike, the remainder a pause. In a poll of Australian economists, 51% expect a rate hike. For once, the polls of economists seem to agree – that there isn’t much agreement among economists.

The market is a little more definitive, with interest rates suggesting a 67% chance of a pause, and only a third are expecting a hike. That means if the economists are right, a hike would be a surprise to the market, and could see the Aussie getting stronger as the majority are caught out. But, if the RBA keeps rates steady, it could also give some room for the AUD to weaken a bit.

It’s all down to the future

Of course there is always a third option, which would be to split the difference. That might mean a hike of 15bps, to bring the rate back to a multiple of 25bps like other central banks. Though, given that could have been an option last time, and the RBA didn’t go for it, the likelihood is somewhat limited.

The other option is to go one direction and then strongly suggest the opposite in the monetary policy statement. Such as hiking, but heavily implying the terminal rate has been reached. Or keeping rates unchanged, but heavily implying that a rate hike is likely at the next meeting. Both of those options could cause additional market volatility as traders wade through the rhetoric and compare it to the context.

The confusing situation

The reason for all this uncertainty is because the data hasn’t been providing a clear picture. It appeared that inflation had peaked at the end of last year, letting the RBA pause. But then inflation started creeping back up, and the RBA resumed hikes. But just last week, inflation came back down again.

Without a sure trend in inflation, it’s hard to predict where the central bank will go. The issue is whether the RBA will try another push to make sure inflation keeps trending lower. Or will they opt to wait and see what happens, to get another month of data, before taking action. And their track record isn’t inclined either way. The RBA has both been cautious with its pause at the beginning of the year; and aggressive with its surprise move last month. We’ll see which option they take this time.

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