RBA Preview: almost too close to call

February 2, 2015

The market is waiting with baited breath for the RBA’s latest monetary policy decision. This Tuesday’s meeting is expected to be a very close call, with most economists still predicting that the bank will leave the OCR at 2.5% while the rest of the market confidently looks for a rate cut. It’s not unheard of that the market and commentators lean in different directions when it comes to the RBA’s monetary policy decision, but it does highlight how close this decision will be.

Why is it going to be such a close call?

The opposing camps both have strong arguments for and against cutting interest rates and without clear guidance from the RBA it’s hard to see which way the board will lean. It wasn’t too long ago that RBA Governor Stevens was pushing back rate-cut expectations in an interview with an Australian newspaper. Stevens wanted clear signals that a rate cut would boost confidence while inflation was low and that the housing market was calm. These are fairly broad parameters and a case could be made for both sides of the fence.

Excluding the inflation outlook, still soft domestic economic conditions, concerns about China’s growth outlook and widespread global monetary policy loosening in response to persistently low inflation are the top arguments for looser rates in Australia. Since the RBA last met numerous major central banks have loosened monetary policy in order to protect their economies from possible deflation or even disinflation in some cases. This is a clear signal to the RBA that the global economy is underperforming prior expectations.

The situation at home isn’t as bleak but there’s still no light on the horizon. Economic data over the last few months has been broadly mixed but not conclusive enough to ensure the RBA cuts interest rates tomorrow without any prior guidance. Our biggest concern is that there are still no real signs of life in non-mining parts of the economy, at least not significant enough to pick-up the slack being left behind by diminishing mining investment.

Unsurprisingly the deciding point will be inflation

There are tentative signs that parts of the economy are beginning to improve alongside a weakening Australian dollar and recent underlying inflation numbers put core consumer price growth within the RBA’s 2-3% target range, albeit near the bottom of this range. Forward looking indicators are mixed but there’s no doubt that inflationary pressures are weaker than predicted only a few months ago. In the midst of softening global and domestic inflationary pressures, the RBA may choose to respond to the threat of lower inflation by cutting the OCR to 2.25%.

Yet, it’s unclear whether the benefits of a cut would outweigh the possible negative implications this would have on Australia’s housing market. After all, funding conditions are already very loose and the impact of looser policy at this stage may be fairly watered-down. In saying that, the bank must do everything it can to fight the threat of disinflation.


On balance we see the RBA cutting interest rates or at least paving the way for an interest rate cut in coming months. At face value this places the bias for the Australian dollar lower, yet traders have also priced in around a 70% chance that the RBA will cut the OCR this Tuesday. Therefore, the RBA would likely have to cut interest rates and/or hint that the bias for rates has unequivocally shifted lower in order for the Australian dollar to have a significant negative reaction.

At present AUDUSD is holding below a key short-term resistance zone around 0.7800. In the unlikely event that the RBA doesn’t cut interest rates and maintains its neutral stance AUDUSD may obliterate this resistance zone on its way to a more important resistance zone around 0.8000. This may play into the RBA’s decision making process; after all it has been very vocal about the need for a lower exchange rate. In the event the bank doesn’t cut interest rates but it paves the way for future monetary easing we expect the AUD may face a small relief rally.

On the downside, given how much of a rate cut is priced into the market already, it would likely have to be a very dovish statement to materially weaken the Australian dollar. In the event the banks cuts interest rates and hints towards further possible cuts we may see AUDUSD break its 5.5-year low around 0.7715.

Publication source
FOREX.com information  FOREX.com reviews

February 27, 2017
Black gold slightly declined amid the crude inventories report
The tone was negative in the oil market on Friday. The price reversed some losses in the night. Buyers returned the benchmark to 56.66 dollars per barrel where Brent caught fresh offers and moved lower...
February 27, 2017
Markets turn focus towards Trump address to Congress
On the evening of Tuesday, February 28th, US President Trump is slated to give a major address to a joint session of Congress in lieu of the usual State of the Union address...
February 24, 2017
Oil prices slightly grew
Brent oil prices extended their recovery in the Asian session on Thursday. Buyers led the price higher and broke 56.50 dollars per barrel in the early European morning...

NPBFX Rating
Vantage FX Rating
Grand Capital Rating
Larson&Holz IT Ltd Rating
 FXTM Rating
OctaFX Rating

TropicalTrade Rating
First Binary Option Service Rating
Beeoptions Rating
Banc De Binary Rating
TopOption Rating
Empire Option Rating