RBA likely to keep interest rate unchanged, wait until Q3 inflation figures

The Reserve Bank of Australia is due to release its monetary policy statement on Tuesday 4 October at 03:30 GMT, and it is widely expected to leave its official cash rate (OCR) at its record low of 1.50 percent, after having cut it by 25 basis points in August.

According to a recent Reuters poll of 57 economists, all see the RBA on hold this time whereas the majority expect another rate cut by mid-2017  --  11 of whom see such a move in November. Also, 11 see rates bottoming as low as at 1 percent. The RBA will remain focused on Australia's third quarter CPI release on 26 October.

A pause in the central bank's easing cycle is consistent with the assessment that recent Australian economic growth data have improved a bit; second quarter GDP rose by a solid +0.5 percent q/q and 3.3 percent y/y (although the quarterly rate was below expectations of +0.6 percent q/q and 1.1 percent in first quarter of 2016). Also, the unemployment rate has fallen to a three-year low of 5.6 percent in August, which further erodes the chances of the RBA cutting interest rates over the near-term.

New RBA Governor Philip Lowe, in his latest comments, remained relatively upbeat in assessing the economy and reiterated that a flexible inflation targeting framework is still "right". He said that recent indications on third quarter growth have been a little above most estimates of trend growth, and the economy is adjusting reasonably well to the unwinding of the biggest mining investment boom in more than a century. He added that it is very unlikely the RBA will run out of policy room and there are better ways to stimulate the economy than zero or negative rates.

Moreover, the CB in its Sept monetary policy board meeting minutes mentioned that the rising Australian dollar would complicate the economic rebalancing; however, a decline in the currency since 2013 continues to support the export sector of the economy. Data suggest that the economy is growing in line with potential, and forward indicators remain consistent with little change in the unemployment rate in coming months. Further, cost pressures and wage growth are set to remain low for some time. Conditions in established housing markets had generally eased, with moderation in house price growth.

We believe that an easing opportunity remains on the cards during 2016, following continued low inflation in Australia. The second quarter inflation rate fell to 1.0 percent y/y.) Therefore, the country's consumer prices will remain the key focus with respect to future policy decisions, and if third quarter CPI stays at a disappointingly low rate, a solid probability exists for a 25 basis points rate cut at the RBA's November policy meeting. We foresee steady monetary policy until then.

Assuming there is no rate move at this meeting, the market will primarily focus on the accompanying comments made by the Governor for any signals about the prospect of a rate cut at one of the upcoming meetings.