Tuesday’s policy meeting by the Reserve Bank of Australia (RBA) will attract special attention as the pressure is growing on policymakers to cut interest rates after key economic measures disappointed, putting the central bank’s “wait-and-see” approach into question. While a rate cut could be wisely avoided ahead of the federal elections this month, investors would still search for signs of whether the Bank could perhaps proceed as soon as this summer.
It is clear that when a central bank wants to send a message it changes its wording. This is what the RBA did at its previous meeting in April as policymakers judged that a rate cut is possible in case the unemployment rate trends up and inflation softens, expressing at the same time that the gradual recovery in inflation “has been taking longer than earlier expected”. While a slight pullback in the data is more or less acceptable, the Australian headline Consumer Price Index dropped materially in the first quarter of the year and below forecasts, from 1.8% y/y in Q4 2018 to a two-year low of 1.3%, raising confidence that the RBA may not wait too long to slash borrowing costs.
Additionally, policymakers should seriously consider the troubling situation in the housing market. On the one hand, the overloaded household debt, which is among the highest worldwide, suggests that lower interest rates would prompt even more borrowing. On the other hand, building approvals witnessed a sharper-than-expected contraction during March, flagging that some sort of support would be helpful to elevate the demand for housing, enhance activities in the construction sector and curb the ongoing discount in property prices. Hence, while current conditions in the housing market give the incentive for lower rates, the debt problem may prevent the Bank from moving forward.
Trade developments between the US and China, Australia’s major export partner, will be also reviewed during the meeting. What was almost a done deal last week, has been derailed over the past weekend thanks to Trump’s aggressive tweets. Specifically, the US president threatened to more than double the tariffs on $200 billion Chinese goods this Friday and introduce new ones, putting this week’s trade talks at risk as the Wall Street Journal reported that Beijing was considering canceling the talks if those happen under threats. While Trump’s sudden reaction could be taken as a tactic to increase leverage in the discussions that resume on Wednesday, the comments reveal that the sides have yet to resolve the sticking points.
Early in April, the RBA Deputy Governor, Guy Debelle, said that the central bank has the capacity to cut but it will not get to that point as expectations are still positive for the future of the Australian economy. Besides with the focus turning to the 2019 federal elections on May 18 and GDP growth figures for release on June 6th, policymakers could wait a little bit longer, probably until the July meeting, to ensure that lower rates are necessary.
Should the central bank appear more concerned about the path of the economy, investors could still sell the aussie even under steady rates. In this case, AUD/USD could retest the 0.6960 area ahead of the 0.6900 psychological level.
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