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RBA Expected to Hold Rates, Then What?

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There is near unanimous expectations that the RBA will stick with the “hold club” of central banks when its two-day meeting ends tomorrow. That’s a bit in spite of some of the recent data trends, such as the slowing economy and the pain of homeowners facing high mortgages. But other indicators are seen as having more weight.

Leaving rates unchanged puts the pressure on RBA Governor Michelle Bullock’s post rate decision presser, where markets will be looking for clues for the rate policy going forward. The monetary policy statement could also offer some fireworks, as the market and the Reserve Bank are a bit at odds on what’s coming.

What Could Move the Markets

There is unusual unanimity in the lead-up to tomorrow’s rate decision. All Australian economists and all international economists agree that there won’t be any change in policy. The market is also pricing in no change. That means that the market could shrug off the actual policy decision.

Where things get complicated is that the RBA has repeatedly signaled that it is open to a rate hike. Economists are nearly universally expecting the next move to be a cut. But it’s not until the fourth quarter in which a majority agree on that proposition. So, the question is whether the RBA doubles down on its hiking rhetoric, or gives it up and comes more into line with the consensus among economists.

The Data that Favors the Options

Despite the economy slowing down, inflation has remained well above target. Additionally, the unemployment rate has also fallen (albeit, slightly). This apparent sign of tightness in the labor market is likely to worry the RBA that inflationary pressures will remain. But jobs are also a lagging indicator, meaning that the unemployment rate can remain low for a while even as the economy slows down. Then the jobless number will “catch up”, which can take a matter of months.

That explains the lead time for when economists expect a rate cut. The slower economic activity now would likely translate into a weakening jobs market in the latter half of the year, and then provide the clarity that the RBA needs to move towards cutting. Therefore, the market is likely to be intensely focusing on any comments regarding expectations around the labor market, and how the members are reacting to the current tightness.

What to Look Out For

Given the latest trends, the market isn’t expecting the RBA to change its stance on whether or not it will hike. That means if the RBA does come out to say that hiking is unlikely (though evidently it can’t rule it out completely), the Aussie could get weaker.

It’s also seen as quite unlikely that the RBA could be more hawkish in stressing the possibility of a hike. Which puts the balance of risk to the downside, and that could lead to some pre-emptive weakness in the Aussie that is later “corrected” if the meeting comes out exactly as expected.

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