There is a solid consensus that the RBA will agree to cut rates by 25 basis points at the end of its meeting on Tuesday. However, there are still some economists who disagree, and some have provided relatively strong comments about what is to come next. Meanwhile, the markets are pointing in a different direction. Who’s going to get it right this time?
In Australia, inflation has continued to soften, allowing it to decline as well. Analysts say that the post-COVID inflation surge is in the rearview mirror. And now the RBA must address the economic and trade situation. Although demand from China for Australian raw materials remains fairly solid, high rates are seen as weighing on the economy. This means it’s more a matter of when, rather than if, the RBA cuts rates.
The Wide Range of Opinions
Eighty-four per cent of international economists agree that the RBA will cut rates at the upcoming meeting. Australian-based economists are slightly more certain, with 88% expecting a rate cut. The four largest banks in Australia are even more certain, with all three agreeing it’s time for a rate cut. Notably, Westpac’s Chief Economist (and former central banker) Luci Ellis made pointed remarks about the RBA’s hesitancy to cut rates.
The markets are even more sure about easing, and are pricing in not just a rate cut at this meeting, but at the one next. That means that unless Governor Michelle Bullock delivers a relatively dovish message after the rate cut on Tuesday, the market is likely to react. Typically, you’d expect a more hawkish central bank to lead to a higher currency, but that might not be the case here.
What the Dissenters Say
If the RBA decides to hold, or issues a message signalling that it will pause after a cut, it’s likely because it has listened to the concerns of the dissenting economists. They have pointed out that, with relatively low unemployment, the RBA is likely to wait until quarterly inflation data becomes available before taking further action.
Analysts generally agree that inflation will be lower; as far as the market is concerned. This could be just a “kick the can down the road” scenario. If there isn’t a rate cut at this meeting, then there definitely will be one in August. So, the gains for the Aussie might be limited in the case of a more hawkish result.
Where’s the Aussie Going?
Over the last month or so, Australia’s currency has been gaining relative to the US dollar. That is despite the RBA being seen as progressively more dovish. This is because the American dollar has been weakening at a faster rate. Primarily, investors fear that the US economy will underperform.
However, the flurry of trade deals being suggested over the weekend has given the greenback a slight boost, dragging on the Aussie pair. Trade developments could have a greater impact on the currency than the central bank’s decision, providing additional and unexpected volatility.
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