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 2.4 percent y/y compared to 4.3% in early 2012.
• The unemployment rate has declined to 5.7 percent as of now.
• The interest rate is at 1.5 percent.
• The inflation rate is currently at 2.1 percent.
• After improvement since last year, Australia’s terms of trade have started declining one more.

Moreover Australian economy continues to face headwinds from weakening growth prospect in China and lower price of its export commodities. Iron ore, which contributes to 20% of the country’s export and 4% of GDP is now down more than 25 percent so far this year.

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 domestic and international situation, along with some confidence over the economy.
   
• RBA has clearly indicated that Australian dollar remains quite overvalued and feels falling exchange rate to 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 cut in future still remain at large.

Market impact –

• Australian dollar currently is up after weaker NFP, however, lower commodity prices are keeping a lid on the exchange rate to the upside. The Australian dollar is currently trading at 0.747 against the USD.
   
• It might stage larger correction, should rates remain on hold. However, upsides are limited against the dollar and would be guided by broad-based dollar strength.
   
• Any rate cut would cause havoc to the downside as policy hold is expected.