RBA to stay on hold as the risks transition

The RBA will likely look through any significant acceleration of tradable inflation. Any acceleration in the targeted core measure of inflation is expected to be much more modest, only returning to the midpoint of the 2-3% yoy target band by the end of the year. Nonetheless, downside risks to policy will persist through the earlier part of 2016. But as we move deeper into the year, the RBA is expected move to a more neutral footing and potentially start removing policy accommodation late in the year. 

The federal election due in late 2016, the changing of reserve bank governor, and potential for further mortgage re-pricing from the banks all pose risks to the rates view. A key source of economic risk would be if dwelling prices materially declined, as this would be expected to exacerbate the downtrend in the dwelling investment cycle and influence consumer spending. The RBA will be cognizant of this and careful not to trigger this cycle itself with a premature policy move.