In the view of analysts at TD Securities (TDS), the Reserve Bank of Australia (RBA) is likely to bring a halt to its tightening cycle when it meets to decide on its monetary policy next Tuesday.
Key quotes
“The RBA hit the pause button last month, and we expect it to leave the cash rate target unchanged again as the Bank would prefer more time to assess the effects of the rapid rate hikes to date.“
“The continued moderation in monthly CPI prints and lower Q1 trimmed mean (RBA’s core inflation measure) give room for the Bank to head for an extended pause.”
“Curve has repriced the RBA and dragged the AUD along with it. But, risks around equity sentiment and US-centric events leave AUD vulnerable still, particularly against crosses where monetary policy is still at play (like EURAUD and AUDNZD).”
“RBA OIS strip points to another on-hold decision, with only 2bps priced for the May meeting. Upside risks to inflation may pressure the Bank to hike in the months ahead, and we like Aus bond flatteners vs US steepeners.”
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The Reserve Bank of Australia will present the latest board meeting minutes today, where the central bank is expected to keep the official cash rate unchanged at a record low of 0.25%. With the economy gradually reopening, central bank watchers have their focus on any potential easing stance in the near future.
The Australian economy started to re-emerge from its Covid-19-induced recession in June, as other nations in the Asia-Pacific region began to experience similar recoveries. The economy has since stabilised and with businesses and households increasingly optimistic, the Reserve Bank of Australia (RBA) is likely to remain on stand-by mode before deciding on easing policies.
RBA is closely monitoring the local labour market and the housing market, both of which have shown remarkable resilience to the pandemic. The unemployment rate, for example, has dropped to 7.3% in August, from a peak of 8.5% in June as job market conditions improve and businesses begin to hire again. At the same time, housing prices rose slightly earlier this month, with the median dwelling price for Australia increasing by 3.0%.
Leading RBA watchers believe the central bank could remain on pause for the foreseeable future. They see the need to continue their current trajectory, as the economic recovery from the pandemic is still fragile. With most economic indicators stabilising and the government actively preparing for the medium-term recovery, the RBA has no reason to provide any added stimulus to the economy.
As the recovery process gains momentum, RBA watchers believe the central bank will take a more gradual approach to monetary policy before further easing. This could be in the form of rate cut in early 2021, although the timing of such a move remains unclear.
In the meantime, RBA policymakers will have another opportunity to express their opinion on the current state of the Australian economy through the meeting minutes of today’s board meeting. It is likely that the central bank will retain its extended pause while it continues to evaluate the economic recovery, with any easing action unlikely to occur until early 2021.
