Reserve Bank of Australia likely to keep monetary policy unchanged

The Reserve Bank of Australia (RBA) is expected to hold its first monetary policy meeting of 2017 on February 7. It is widely expected to maintain its bank rate at a historic low of 1.50 percent amid global market uncertainties.

Evidence increasing that Australia is at a positive transition point for nominal growth, inflation and wages. Also, the unemployment rate has been unchanged for 9 consecutive months (trend basis) and the improvement in Q4 full-time employment will alleviate RBA concern. If downside tail risks continue to subside and broader momentum improves as expected, RBA's next policy move will be 25 basis points hike in the first-quarter of 2018, said Goldman Sachs in its research note.

Moreover, forward-looking indicators of the labour market weakened somewhat in December, suggesting some headwinds in the first half of 2017. The average jobs hours remains range bound, rising slightly to 34.8 hours in December, from 34.7 hours in November.

“We think these indicators point to the resilience of Australia's job market going into 2017, and lower job advertisements, we believe Australia will continue to see modest jobs gain in the first-half of 2017, amid rising labour force participation rate,” said Barclays in its note on Australian employment.

Unless there is significant AUD appreciation, we think the central bank's bias will be to keep rates unchanged for some time. We expect the RBA to stay on hold throughout 2017.