RBA Rate Decision: To Hold, But What Comes Next?

Economists and analysts are pretty much in unison in expecting that the RBA rate will keep steady at the conclusion of its August meeting tomorrow. The main issue for how the Aussie reacts, however, is what is forecast to happen beyond that. Until recently, the expectation was that the RBA would be biased towards hiking the RBA rate in near future. But the latest data has changed that perspective.

The question for traders and the market now is whether the central bank agrees with the market, or it keeps to the tone suggesting that more RBA rate could be possible. It’s been pretty common for the markets to get ahead of central banks in hopes of easing, and often this leads to a reality check when the actual decision happens. That typically results in a stronger currency.

What Changed, and Will It Last?

Australia is using a “new” technique of measuring inflation once a month, since up until recently the main focus was on quarterly changes in prices. It’s not a major change, but there is an adjustment period as the quarterly data is still seen as more important to determine what the RBA will do. Up until recently, the bias was in favor of more tightening, because inflation was well above target.

Then Q2 CPI came in at 3.8%, which was up from 3.6%. But, since it is in line with what the RBA had been forecasting, the market generally took it as a sign that more hikes won’t be needed. The Aussie took a dip in response. This comes after the government announced it would provide an energy rebate of AUD300, which will be assessed in the RBA’s Statement of Monetary Policy (SMP) for August, with the expectation that headline inflation will be revised lower.

But There Are Dissenting Voices

Even though the consensus has shifted among (international) economists that there not only won’t be a rate hike tomorrow, but the next move by the RBA will be to cut some time by the end of the year, some Australian economists disagree. They say that the risk of high inflation isn’t entirely over, and the latest monthly CPI figures have been trending higher and away from the RBA’s target.

The central bank can hardly come out to declare that the fight over inflation is won if the latest CPI readings rose from the prior ones. This has left a small contingent of Australian economists forecasting a rate hike at the next meeting. If that happens, it would be a major shock to the markets.

Where the Moves Can Happen

The markets are pricing in no rate change and a largely neutral statement by the RBA and in the rhetoric used by Governor Michelle Bullock later in the press conference. But, if the minority is right, then the statement could stick to prior rhetoric about rate hikes not being taken off the table. That could also surprise the market, and give the Aussi a bit of a boost.

The mitigating factor could be any chances in the forecasts in the SMP. If there is a downgrade in the outlook for inflation even if the RBA sticks to its guns on the potential for future rate hikes, it might leave the market satisfied in their assessment, and reduce the noise following the interest rate decision.

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