It’s a very busy week for economic data releases this week. In addition, we also have the Reserve Bank of Australia’s monetary policy decision on Tuesday following the monthly Board meeting and the market is unanimous in expecting no change to rates. There are at most only 5 basis points of rate cuts currently priced in by the interest rate futures market this year, while there are rate hikes priced in for 2015 (refer chart below).
In contrast, the most recent Bloomberg poll of economists’ forecasts for the official cash rate show that some economists (albeit a small minority) expect another one or even two rate cuts this year. The Reserve Bank is already forecasting below trend growth this year and an unemployment rate above 6.0%. Therefore, the economy would need to deteriorate beyond these levels for the RBA to contemplate another rate cut. The strong housing market and potential upward pressure on inflation from the lower Australian dollar will also add to the argument to hold the cash rate at its current level.
For me, the likely outcome is for stable interest rates for the foreseeable future which should be emphasised in the commentary after this Tuesday’s RBA Board meeting.