Heads up, Aussie traders! The Reserve Bank of Australia is scheduled to make its much-anticipated interest rate decision this week so I’ve rounded up a few things we could expect from this event.
To cut or not to cut?
That is the question most market analysts are trying to answer these days. In fact, a number of forex junkies were already expecting an interest rate cut in last month’s RBA statement, citing that the decision to stay on hold simply increases the odds for additional easing this time.
The transcript of the RBA’s monetary policy huddle back in July revealed that the Australian central bank would “make any adjustment to the stance of policy that may be appropriate” depending on “further information on inflationary pressures, the labour market and housing market activity” so let’s take a closer look at these data points to see if any improvements were made or not.
First up, inflation came in mostly in line with expectations, as the Q2 CPI reading posted a 0.4% increase in price levels. The core version of the report printed a higher than expected 0.5% rise for the same period, outpacing the 0.4% consensus and the previous quarter’s 0.2% uptick. However, annual inflation edged down to a 17-year low of 1.0% so policymakers could still chalk this up as a disappointment.
Aside from that, import prices for the same quarter indicated a surprise 1.0% tumble versus the projected 1.6% gain. This puts an additional drag on domestic price levels, as it follows a sharper 3.0% decline for the first three months of the year.
Next, Australia’s June jobs report also failed to impress since it showed a smaller than expected 7.9K increase in hiring instead of the projected 10.1K rise. This was also slower than the previous month’s 19.2K pickup in employment. A closer look at the components of the report, however, shows a slight improvement in labor force participation, which was partly responsible for the rise in the unemployment rate from 5.7% to 5.8%.
Lastly, there’s still a considerable degree of upside pressure on house prices in Australia, keeping policymakers wary of a potential property bubble. Based on a report from property market analysis firm CoreLogic, home prices in its capital cities such as Sydney and Melbourne rose 0.8% in July, amounting to a 6% year-over-year gain.
Meanwhile, home loans fell less than expected in May, which suggests that market demand is present despite higher prices. According to the Australian Prudential Regulatory Authority, loans for owner-occupied housing rose 0.9% while loans for housing investment advanced 0.29% in June, possibly giving the central bank reason to keep sitting on its hands for now. After all, cutting benchmark interest rates would lead to lower mortgage rates, likely stoking the housing bubble further.
As you’ve probably guessed, RBA policymakers are caught between a rock and a hard place since cutting interest rates to boost inflation and economic activity could cause the property bubble to burst. Several economic gurus seem to be counting on a 0.25% interest rate cut, though, as the Aussie’s recent rallies could also force the central bank to act.
“The board has repeatedly warned that the exchange rate could complicate the recovery and we think renewed strength would make the RBA uncomfortable,” noted ANZ’s head of Australian economics Felicity Emmett. That’s because a stronger Australian dollar gives a double-whammy to the economy by weighing on domestic inflation and hurting export demand.
In addition to a potential rate cut this week, Chief Australia Economist Paul Dales from Capital Economics even projected that the RBA could lower interest rates all the way down to 1.00% by next year. On the flip side, Westpac Chief Economist Bill Evans pointed out that the central bank usually cuts its short-term growth and inflation forecasts before deciding to ease, and there have been no downgrades made recently.
In a nutshell, it looks like things could really go either way for the RBA (Hey, that rhymes!) and also for the Australian dollar. A decision to stand pat and stay optimistic about an economic rebound could mean stronger gain for the currency while a dovish bias or an actual rate cut could spur sharp losses. Either way, additional volatility could ensue before, during, and after the event so make sure you’ve got the necessary adjustments if you have any AUD positions open!