RBA rate decision preview

Reserve Bank of Australia (RBA) will announce its monetary policy decisions today at 4:30 GMT.

Economy at a glance –

• The economy is growing at 2.3 percent y/y as of Q4 2018 compared to 4.3 percent in early 2012. But growth has increased from 1.8 percent in the first quarter of 2017.
• The unemployment rate has declined to 5 percent as of now. It has declined from 6.3 percent in 2014, despite regular increases in the participation rate.
• RBA maintaining the Interest rate at 1.5 percent.
• The inflation rate is currently at 1.3 percent as of the first quarter of 2019, down from 2.1 percent in Q2 2018, which was the highest since the second quarter of 2014.
• Australia’s terms of trade have improved to the highest level since 2012.

Iron ore, which contributes to 20% of the country’s export and 4% of GDP has been rising lately.

RBA stance –

• RBA is currently pursuing a neutral monetary policy path. However, in recent times, the commentaries have significantly turned dovish as RBA is possibly preparing grounds for future rate cuts. In previous statements, it has clearly indicated its worries about the international situation, despite the confidence over the economy, especially of the impact of a trade war between the U.S. and China.
   
• RBA has clearly indicated that the Australian dollar remains quite overvalued and feels that a falling exchange rate would benefit the economy and balance the risks.
   
• RBA central bankers have indicated that the bank stands ready to cut rates if necessary.

Expectation today –

• Economists surveyed by Bloomberg, expects RBA to keep rates on hold at 150 bps at today’s meeting.

Market impact –

• The Australian dollar has been declining since December 2017 after a steady rise of 700 pips and reaching 0.82 area. However, it has recovered somewhat after declining to 0.675 area in December 2018.
   
• There is unlikely to be an impact, should rates remain on hold. However, the downside is limited against dollar unless key support around 0.7 and 0.675 area cleared and would be guided by broad-based dollar strength. The Australian dollar is currently trading at 0.7 against the USD.
   
• Any dovish bias would cause havoc to the downside for the Aussie as policy neutrality is expected.