29 Apr 2016
RBA Preview: No rate cut but shift to dovish bias - ING
According to analysts from ING, despite low inflation numbers from Australia, the Reserve Bank Australia (RBA) will keep rates unchanged but they expect a dovish shift in policy bias.
Key Quotes:
“With labour costs subdued and the global inflation backdrop still relatively benign, the RBA recently admitted that domestic CPI inflation is set to “remain low over the next year or two”. The negative surprise to 1Q16 CPI (actual 1.3% YoY vs 1.7% cons) has fuelled market expectations for an RBA rate cut, with talk of a move as early as next week’s meeting (3 May).”
“Will the RBA pull the rate cut trigger next week? We think not, but certainly look out for a dovish shift in policy bias. While the prior statement stated that “continued low inflation would provide scope for easier policy”, we suspect that next week might be too soon for a material RBA rate cut.”
“Indeed, it would be a complete U-turn on what has been some progressive steps towards a more neutral stance. Moreover, on the inflation front, one saving grace might be the fact that survey-based inflation expectations have remained resilient in recent months (around the 3.5% mark). While it is likely to be a close call, we favour a “no change” outcome given the improving growth backdrop, more stable global environment and ongoing concerns over a buoyant property market.”
“The RBA opening the door to future rate cuts is a game-changer for the AUD outlook; part of the recent rally had been founded upon rate differentials moving in favour of the AUD.”
“Markets are pricing in a strong chance of a cut next week (circa 60% probability) and therefore should the RBA remain on hold for now (our base case), we may see an initial relief rally in the AUD. Yet, expect any upside to be shortlived; we continue to think that the bearish fundamental backdrop and waning seasonal effects will see AUD trade lower in the coming months. Look for AUD/USD to fall back to 0.72 by 2Q16, while we also like to tactically sell AUD against JPY & NZD.”
Key Quotes:
“With labour costs subdued and the global inflation backdrop still relatively benign, the RBA recently admitted that domestic CPI inflation is set to “remain low over the next year or two”. The negative surprise to 1Q16 CPI (actual 1.3% YoY vs 1.7% cons) has fuelled market expectations for an RBA rate cut, with talk of a move as early as next week’s meeting (3 May).”
“Will the RBA pull the rate cut trigger next week? We think not, but certainly look out for a dovish shift in policy bias. While the prior statement stated that “continued low inflation would provide scope for easier policy”, we suspect that next week might be too soon for a material RBA rate cut.”
“Indeed, it would be a complete U-turn on what has been some progressive steps towards a more neutral stance. Moreover, on the inflation front, one saving grace might be the fact that survey-based inflation expectations have remained resilient in recent months (around the 3.5% mark). While it is likely to be a close call, we favour a “no change” outcome given the improving growth backdrop, more stable global environment and ongoing concerns over a buoyant property market.”
“The RBA opening the door to future rate cuts is a game-changer for the AUD outlook; part of the recent rally had been founded upon rate differentials moving in favour of the AUD.”
“Markets are pricing in a strong chance of a cut next week (circa 60% probability) and therefore should the RBA remain on hold for now (our base case), we may see an initial relief rally in the AUD. Yet, expect any upside to be shortlived; we continue to think that the bearish fundamental backdrop and waning seasonal effects will see AUD trade lower in the coming months. Look for AUD/USD to fall back to 0.72 by 2Q16, while we also like to tactically sell AUD against JPY & NZD.”