The Reserve Bank of Australia is due to announce its latest policy decision on Tuesday amid a mixed outlook for the economy. Australia’s central bank is almost certain to hold rates unchanged at 1.5% following disappointing inflation and retail sales numbers for the third quarter.
Rising household debt has been holding back consumer spending, with anaemic wage growth further restraining households’ spending power. Like in most other advanced economies, a tightening labour market in Australia has done little in lifting wages, despite impressive increases in full-time jobs in recent months. Inflation meanwhile fell further below the RBA’s 2-3% target band in the third quarter after briefly hitting the target during the first three months of the year.
The subdued inflation outlook has kept rate cut hopes alive, though the majority view is that the RBA will stay on hold until late 2018, when the first rate hike is expected to come. Given the improving global growth outlook and steady Chinese demand for raw materials, the RBA is unlikely to make an impulse response to any weak data releases, especially as construction activity and exports performance remain strong.
The RBA’s latest quarterly outlook report – the November Statement on Monetary Policy – might prove more insightful about future policy than Tuesday’s policy announcement. The report, due on Friday, will likely show broadly unchanged forecasts for growth and inflation. But the Australian dollar could be susceptible to any notable changes to the inflation picture, especially if it points to a possible delay to the timing of the first rate hike.
The aussie has turned bearish in the medium term after retreating sharply (about 6%) from its September two-year high of $0.8124, and falling below its moving averages. The downtrend stalled after finding support around the $0.7630 area. If the aussie manages to avoid a breach of this key support after next week’s events, the currency might start to see a shift in sentiment to a more neutral one.
