FxWirePro: RBA’s OCR to slide to 1 pct by end-2017 if CPI fails to recover

The easier monetary policy has helped to bolster country’s demand, as the Reserve Bank of Australia (RBA) reacted to sub-target inflation by cutting the official rate by 50 basis points this year to 1.50 percent.

Additionally, the RBA’s policy stance in 2017 will completely depend on the developments in consumer inflation and in the event that the Australian dollar appreciates. The RBA's first monetary policy meeting for 2017 is scheduled to be held on Tuesday, February 7.

We at FxWirePro, expect that the RBA's OCR will slide to 1 percent before end-2017 if consumer inflation fails to reach the CB's target range. However, the central bank is also likely to remain on hold then as the recovery in global energy prices, consistently lower unemployment and recent indications of solid economic growth do not motivate a further interest rate cut until the first half of 2017, unless there is a strong appreciation in the Australian dollar in the near term.

Moreover, Australia's GDP during the third-quarter of this year contracted, at the biggest pace since the global financial crisis in 2008-09 and also in sharp contrast to what markets had initially anticipated. The major drag came from mining and investment, along with weakness in consumer spending as well.

The country's third-quarter GDP contracted -0.5 percent q/q, down from +0.6 percent in the previous quarter, against market expectations of a +0.3 percent q/q rise. However, on an annual basis, it came in at +1.8 percent y/y (consensus was for +2.5 percent y/y), falling sharply from previous 3.3 percent y/y.

Meanwhile, the RBA, also, believes that the weak momentum will be short-lived, as is evident from the December monetary  policy meeting. According to the central bank's half-yearly forecasts, the economy is expected to register an annual growth of around 3 percent in December quarter. Lastly, we expect that the RBA will be forced to lower rate if economic conditions fail to improve in 2017.

Meanwhile, AUD/USD has appreciated during the first quarter of this year, while making a correction through the rest of the year, depreciating and also remaining volatile. The currency pair is now trading at 0.7206, up 0.40 percent, while at 5:00GMT, the FxWirePro's Hourly AUD Strength Index remained neutral at 60.20 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex