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Weekly Economic Commentary

Weekly Economic Commentary

Categories: General

The Reserve Bank Board meets this Tuesday and markets are expecting the RBA to hold rates steady. The higher Australian dollar could tip a reluctant RBA into cutting rates, but markets are not putting much probability of this happening at the moment (currently only a 5% chance of a cut). The Trade Weighted Index (TWI) is 6% higher since the March RBA Board meeting, but is still 19% below its peak and should therefore not be enough (by itself) to shift the RBA into action.. There may be a risk that the Aussie keeps rising against a weakening US dollar, particularly if the US Federal Reserve remains on hold for longer than expected.

Then there’s the question, would a rate cut (or even two) make much difference to the Australian dollar against a backdrop of a lower US dollar and higher commodity prices?

I think the RBA is more likely to ease monetary policy if inflation and economic activity weaken and this is still some time off. The futures market-based probability of a cut by June has moved down to 40%, with a 100% probability of a cut priced in for December (refer chart below).

Implied cash rate pricing from interbank futures market

Source: Rural Bank


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