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RBA Seen Keeping Policy Steady

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The Reserve Bank of Australia is among the plethora of central banks holding RBA policy decisions next week, but that doesn’t mean it will be lost in the crowd. Australia has been facing the fallout of China’s slow economic recovery, but the rebound in demand for raw materials could be swinging back to support the antipodean dollar.

But, next it could be up to the RBA to weaken the Aussie once more as the central bank pivots away from its hiking bias. There have been three meetings so far in which it has been essentially in “pause” mode. The question now is whether Governor Michelle Bullock will definitively communicate that the path forward is downward, though stopping short of giving a specific date.

It’s Too Early

The latest surveys among economist finds a surprising amount of unanimity. Both international and domestic economists agree across the board that the RBA will hold rates unchanged at the upcoming meeting. Where differences of opinion rise is around what happens after that.

Up until recently, the RBA has been notably hawkish, and contrary to most of the other major central banks in the world as it deals with relatively high and stubborn inflation. Even though the bank is technically “holding” in an upward cycle, no economist actually believes another rate hike will be forthcoming in the near future. It’s just that other major central banks are expected to start cutting in June, while the RBA might have to wait a while longer.

Forecasting the Shift

The market isn’t pricing a rate cut until the third quarter. Economists are not any more optimistic about easing, with the consensus of a rate cut not coalescing until September. With that in mind, there is no rush to expect the RBA to start signaling that a rate cut is coming. In fact, the accompanying statement and the presser could just as well remain as hawkish as last time and still match economists’ outlook.

The consensus is for just two rate cuts this year, likely to happen in the third and fourth quarters. That has left analysts forecasting that the RBA will keep its communication unchanged as it looks to deal with inflation going into the Australian winter. The major banks in Australia are also counting on there being no rate cuts until September, with some even saying it won’t be until November.

Follow the Leader

Some analysts argue that the RBA will take some guidance from the Fed, as the rate differential between the American and Australian dollar can impact price stability. That is, if the RBA moves towards easing faster than the Fed, it can widen the yield gap between the respective currencies. Historically speaking, the RBA has been a laggard in easing with respect to the Fed, and cuts at a much slower pace. Typically, commodity currencies have higher interest rates than the currency majors, and shifting the timing of rate cuts could restore that dynamic which was disrupted by the pandemic.

With the markets likely not expecting a shift in the RBA’s stance, should Governor Bullock provide some more clarity on when the pivot away from hiking might happen, the Aussie could see some downside. Virtually no one is expecting the possibility of a move towards further hawkishness.

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