RBA Preview: what to expect from this month’s RBA meeting

The economic data that matters:

What are the key themes to watch out of this RBA meeting?

Will the RBA adjust policy?

Coming into the RBA meeting, the simple question is whether the central bank will choose to ease policy, or not. In the past fortnight, signaling from the RBA, signs of a faltering economic recovery, and some predictions from high-profile pundits have led the market to price-in a better than even chance that the RBA will cut rates at this meeting. Interest rate futures are pricing in slightly greater than 5 basis points of a possible 15 basis point cut from the RBA, while the bond market is implying 10 basis points of a possible 15 basis points of cuts to the central bank’s yield curve control target.

What could the RBA do to ease policy?

While the market has generally settled on the notion the RBA will cut the cash rate and yield curve control target, as its desired means of easing monetary policy conditions, there are questions surrounding what else of what more the RBA could do with policy settings. The RBA has recently thrown water on the notion of negative interest rates and currency intervention, questioning their long-term efficacy. Calls for a more traditional quantitative easing program, or perhaps yield targets further along the yield curve remain prevalent. However, the RBA has largely stayed reticent on both policies.

What's the outlook for the Australian economy?

If the RBA cuts rates at this meeting, the central bank is expected to justify the move on the basis of a slower recovery in the Australian economy. Although the RBA has stated that the economic downturn from the Covid-19 pandemic wasn’t as severe as the first forecast, the recovery is unfolding at a rate slower than initially expected, in large part due to a slower rebound in global growth, and Victoria’s recent lockdowns. A weaker economic outlook is likely to be delivered from the RBA going forward, leaving the door open for further policy support in the future.

How could the RBA meeting impact the financial markets?

This RBA meeting will be a high-impact one for the markets, given the ambivalence about whether the central bank will ease policy implied in rates markets. A rate cut will be a big tailwind for risk assets, especially domestic focused stocks within the ASX200. Australian bonds would also stand to rally, while the AUD/USD would be set for a fall. The reverse would be true if the RBA holds off on cutting at this meeting. The consequent jump in bond yields, along with the Australian Dollar, would be a hit to sentiment, with the ASX200 likely to tumble on such a move.

AUD/USD

The AUD/USD promises volatility around this month’s RBA meeting. The split in market pricing means the pair will have to choose a direction, reflecting the central bank’s decision. The question will be how long any RBA-inspired move in the currency happens to last. Less a reflection of local monetary policy lately, the AUD/USD has traded more on a combination of Dollar strength, iron ore prices and broader market sentiment. The AUD/USD has traded in a tight correlation with S&P500 futures, with that trend likely to persist, even if the RBA eases policy.