The Reserve Bank of Australia is expected to keep the cash rate unchanged at 2% on 2 February. Markets are also expecting the central bank to hold rates, with the likelihood of a move close to zero. In February 2015, the RBA had lowered the rate; however, the bank has altered its thinking since then. Earlier the central bank thought that the jobless rate will stabilise only if the economic growth reached trend, which was gauged at 3% by the RBA. It has since then revised its assessment down for trend growth to 2.75%. In November 2015, the central bank projected that the economy will expand at 3%, more than trend.

"Our forecast for GDP growth (on a no policy change basis) in 2016 is 2.75%. There is a decent chance that the Bank will also revise down its growth forecast for 2016 to 2.75% but that will still be around trend and therefore not require any assumption that the unemployment rate will rise from this point", says Westpac.

However, the central bank might not prefer to change its 2016 growth forecast until the scenario for global growth and key domestic factors, mainly housing, are clear. The RBA, in fact, is likely to revise its 2015 growth forecast upwards to 2.5% from 2.25%. At present, the central bank does not seem to be worried regarding the recent figures of low inflation. The lower than projected inflation might allow the RBA to cut if required. However, the current depreciation of AUD and the labor market performance does not call for a cut at present.

According to the central bank, the underlying inflation in 2016 is expected to be 2.5%, which will need the underlying inflation to average 0.6% per quarter. Moreover, the lagged pass through from the AUD's depreciation is likely to result in the underlying inflation to accelerate to 2.5% from the current 2%.