The RBA rate decision on Tuesday offers an opportunity to shake up the markets. There is a pretty strong consensus that has led the market to price in a specific outcome. However, there are reasons to believe that the RBA could take an unexpected action. That means the conditions are set for a significant market move if there is a surprise in the rate decision.
Among international economists, there is unanimity in the expectations that the RBA will hold. But, among Australian economists, there is some division. 86% say the RBA will leave rates unchanged, with the small group of dissenters calling for a rate cut. The top four Australian banks are also predicting a rate hold.
Why the RBA Could Hold Rates
The main argument given by analysts in favor of interest rates staying unchanged after the RBA rate decision is the recent uptick in inflation. Q3 CPI unexpectedly rose to 3.2% on an annual rate, which is above the RBA’s 2-3% target band. The RBA’s preferred core measure was 1% higher at the end of the quarter, which a larger acceleration than the RBA itself had predicted. The central bank’s forecasts called for inflation to rise by 0.6% in the third quarter.
The RBA has been in easing mode this year, and an uptick in inflation during the third quarter was expected. The RBA’s forecasts showed inflation falling back in the coming months, justifying further rate cuts. Economists argue that since its forecast have proven to underestimate what actually happened with consumer prices, the RBA will have to reassess the situation. And that will mean keeping rates as the are.
Why Could the RBA Cut Rates?
Despite the inflation situation, the RBA does have a history of going against the consensus. Economists and major Australian banks had predicted a rate cut in the the summer, but the RBA held rates unchanged. So, it’s not out of the question that the RBA can buck the economic consensus. But, in the past, it had been to be more hawkish than expected, and the market does tend to be biased towards central bank dovishness.
Those arguing for a rate cut point to a cloudy economic outlook for the Australian economy. Even though inflation was unexpectedly high in the third quarter, they say, it will turn back around quickly amid sluggish economic performance amid the trade war and rising living costs. Australia’s job market has underperformed, reducing the usual organic upward pressure on prices.
How the Market Will React
Besides a rate cut or a hold, the RBA could also influence the market by emphasizing hawkishness or dovishness. The market is pricing in a hold with the RBA keeping the door open for a rate cut at the December meeting. The RBA has a chance to be slightly more hawkish than expected by holding and also suggesting that it will keep rates unchanged for a while longer. However, this is very unlikely.
The more likely surprise for the market is for the RBA to cut, and then suggest that it will pause at the next meeting. This would be a “hawkish cut”, but would still likely weaken the AUD. Or, it could hold as expected, but in the post rate decision press conference emphasize concerns about economic growth and the labor market that lead markets to be convinced a rate cut is coming in December.
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