RBA Meeting: Don’t Rule Out a Disappointment

It is going to be a busy night in Australia with the Reserve Bank gearing up for its next monetary policy announcement. The last time the RBA met was on May 3rd and at the time, the central bank left rates unchanged even though they expected inflation to rise because they felt the strong Aussie would help to hold prices down. However given the trend of inflation and the central bank’s rosy outlook for growth, “rates will need to be increased at some point” according to the RBA. The only question is, how quickly will the RBA act?

Based upon how the economy has performed since the last monetary policy announcement, there should be no urgency within the RBA to raise interest rates. Service and manufacturing activity slowed materially in May while inflation expectations and consumer confidence declined. GDP numbers for the first quarter showed growth contracting by 1.2 percent, which was the steepest decline in 20 years. The table below shows how the Australian economy has deteriorated since the last RBA meeting and yet many people expect the RBA to be hawkish with a minority even calling for a 25bp rate hike this evening.

Why in the world would economists be so optimistic given the deterioration in the Australian economy – the reason is because continued demand for Australian products has helped to boost the terms of trade while investment demand remains solid. The sharp pull back in the first quarter only means a stronger rebound in the second according to market watchers. Although recent comments from the RBA suggests that the central bank is optimistic about the outlook for the local economy, we would not rule out the possibility of more cautious comments given the disappointments in economic data and the strength of the Aussie.

How Has the Australian Economy Changed Since May?

About Kathy Lien 236 Articles

Kathy Lien is an Internationally Published Author and Chief Strategist of DailyFX.com, one of the world’s most popular online websites for currency research. Her trading books include the highly acclaimed, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2005, Wiley); High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia); and Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley). As Chief Currency Strategist at FXCM, Kathy is responsible for providing research and analysis for DailyFX, the research arm of FXCM. She also co-edits the BK Forex Advisor, an Investopedia.com Premium Service with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 2 Trillion/day FX market.

Kathy is also one of the authors of Investopedia’s Forex Education section and has written for Tradingmarkets.com, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. She is frequently quoted by Bloomberg, Reuters, the Wall street Journal, and the International Herald Tribune and has appeared on CNN, CNBC, CBS and Bloomberg Radio. She has also hosted trader chats on EliteTrader, eSignal and FXStreet, sharing her expertise in both technical and fundamental analysis.

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