RBA likely to stay on hold Tue as positive economic data boosts sentiments

The Reserve Bank of Australia is expected to keep rates unchanged at its official monetary policy meeting scheduled to be held on June 7 at 4:30 GMT. The central bank had already eased policy stance by 25 bps in its meeting in April, leaving the official cash rate at its record low of 1.75 percent.

According to a recent poll of 50 economists by Reuters, 49 expect the RBA to stay pat, while foreseeing a rate cut in September

Recent Australian economic data have surpassed market expectations, with Q4 GDP gaining 1.1 percent q/q, after rising an upwardly-revised 0.7 percent for the previous quarter, and the y/y rate picked up to as much as 3.1 percent. The unemployment rate remained unchanged at 5.7 percent in April, while the April trade figures were impressive. These further eroded any chance of a monetary easing at this meeting. A historically weak AUD creates an upward bias on the economy’s real estate prices amid an environment of low interest rates.

Further, economists have not completely ruled out the possibility of a rate cut this year, especially after Q1 headline inflation fell to 1.3 percent from 1.7 percent in the previous quarter. However, this remains well below the RBA’s target rate of 2 percent inflation.

The RBA, in its May monetary policy board meeting minutes, said that a probable rate cut remains on the table if wages and inflation continue to witness a drag. Members noted that recent developments have not led to drastic changes in the outlook for economic activity or unemployment, but the inflation forecasts have been revised lower.

Furthermore, Governor Stevens in his latest comments said further cuts in interest rates remain on the agenda, but he must consider the longer-term risks of too low rates, i.e. the danger of excessive leverage. He also said that real GDP has been growing at a slower pace, even though easy monetary policy and lower AUD are helping growth; therefore, the economy is likely to expand at a moderate pace going forward.