The Reserve Bank of Australia – Will they or Won’t they?

By Barbara Zigah

While the world’s attention will turn tomorrow to the opening of the 2-day policy meeting of the Federal Reserve Bank’s FOMC, they are not the only central bank with important decisions to be made.  The Reserve Bank of Australia meets tomorrow for their monthly policy meeting, and foremost of concern to the Bank governors (not to mention investors) is whether or not they intend to hike the country’s cash rate in response to inflationary trends.

For the past 5 months, Australia’s cash rate of 4.5% has been unchanged.  Recent mixed economic data, including a strong rise in export prices, a smaller rise in consumer prices, a nominal gain in housing prices and lackluster manufacturing lead to a single conclusion:  it’s a crapshoot as to what the RBA might do.  Some analysts suggest that the likelihood that the RBA will hike the cash rate is about 20%, while others suggest its split 50-50.  But the RBA has been known to throw a curve ball now and again, catching markets flat-footed.

Some analysts conclude that a potential mitigating factor might be the strength of the Australian Dollar.  The AUD/USD, trading earlier at $0.9981, has been trading in a very narrow band since parity was first struck (and has since retreated) nearly two weeks ago, and it remains vulnerable to volatility, which is expected to increase as the week progresses.  Against the Japanese Yen, the AUD/JPY was trading higher at 79.63 Yen.

It has been suggested by one analyst that the RBA won’t make a decision until after the Fed does.  Given that the Fed won’t make any policy announcement until Wednesday, when the RBA meeting has already concluded, then it seems clear that the Australian central bank has made a decision after all.