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

The economic data that matters:

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

How have the economic fundamentals changed?

In its last commentary to the market in 2019, the RBA maintained that it sees the Australian economy at a “gentle turning point”, but that it will continue to monitor the efficacy of previous interest rate cuts on economic fundamentals. It flagged that it would be updating its economic projections around this month’s meeting, and would reassess the policy outlook based upon those figures. The markets are expecting that although no change in interest rates ought to be forthcoming at this meeting, the RBA will likely downgrade it guidance for future growth, and acknowledge that further interest rate cuts may be required to see its policy objectives hit.

What will be the impact of coronavirus, bushfires and drought be on the economy?

Adding to its soft fundamentals, the Australian economy is currently experiencing the effects of several negative external shocks. The economic impact of the country’s unprecedented bushfire season is still unknown, but is predicted to almost certain to place some drag on already soft domestic consumption. On top of that, it appears increasingly likely that Australia’s export sensitive sectors will experience some headwinds courtesy of the probable headwinds the unfolding coronavirus pandemic will have on China’s economy. Market participants will be keeping attuned to how the RBA views these risks to the Australian economy’s fundamentals, and whether it may play into its policymaking in the short-to-medium term.

Could the RBA cut interest rates at this meeting?

Following better than expected jobs and inflation data in January, the implied odds of an interest rate cut from the RBA at this month’s meeting dropped to around 10 per cent. This is down from a roughly fifty-fifty odds interest rate traders had been giving in the middle of January. The odds of a rate cut have crept back to around 20 per cent in recent days, as panic builds about the possible economic impact of the coronavirus. However, the consensus view amongst economists and traders alike remains that the RBA will keep policy steady at this meeting, with market pricing suggesting the next cut will likely instead arrive in April.

How could the RBA meeting impact the financial markets?

Australian Dollar

The A-Dollar is presently trading as a proxy for Chinese growth, amidst building concerns about the potential impacts of the coronavirus. Hence, in the short-term, this month’s RBA meeting may have a relatively minor impact on the fortunes of the A-Dollar. The AUD/USD may find itself briefly bid off the back of this meeting, if the RBA indeed keeps interest rates on hold, as markets price-out the approximately 20 per cent chance of a cut at this meeting. Nevertheless, in the bigger picture, given a cut from the RBA in the near future is practically considered a lock, the trend for the AUD/USD remains firmly to the downside.

ASX200

The ASX 200 is swept up in the widespread de-risking occurring in global stock markets. Having recently run to record highs, the ASX200 has declined by over 3 per cent in recent weeks, as the coronavirus outbreak casts doubts over future growth. Investors will out of this RBA meeting be looking for indications that the RBA remains tilted towards a dovish bias. In the absence of strong fundamentals, the ASX200 has been driven to its recent highs simultaneously by improved global sentiment, and the prospect of lower domestic interest rates in the future. Ongoing strength in Australian stocks will rely on the RBA maintaining policy support to the economy, and keeping risk-free rates low.