RBA rate decision preview

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

Economy at a glance –

• The economy is growing at 3.4 percent y/y as of Q2 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 5.3 percent as of now. It has declined from 6.3 percent in 2014, despite regular increases in the participation rate.
• RBA maintaining Interest rate at 1.5 percent.
• The inflation rate is currently at 2.1 percent as of the second quarter of 2018, which is the highest since the second quarter of 2014.
• Australia’s terms of trade have improved to the highest level since early 2014 but once again started declining in 2018.

Iron ore, which contributes to 20% of the country’s export and 4% of GDP has recovered steadily since early 2016. However, it has declined almost 12 percent since February 2018.

RBA stance –

• RBA is currently pursuing a neutral monetary policy path. It has shifted away from a dovish stance, however, remains far from being hawkish. 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.

Expectation today –

• Economists surveyed by Bloomberg, expects RBA to keep rates on hold, however, possibilities of a rate hike in future remains at large.

Market impact –

• The Australian dollar is declining since December 2017 after a steady rise of 700 pips and reaching 0.82 area. The Australian dollar is currently trading at 0.723 against the USD. It is undergoing a sell breakout.
   
• There is unlikely to be an impact, should rates remain on hold. However, upsides are limited against dollar unless key resistances till 0.75 area cleared and would be guided by broad-based dollar strength.
   
• Any dovish bias would cause havoc to the downside for the Aussie as policy neutrality is expected.