RBA rate decision next week – hold or cut?

<p>Australia’s central bank – the Reserve Bank of Australia (RBA) – is due to meet on Tuesday in its first meeting this year. Its last […]</p>

Australia’s central bank – the Reserve Bank of Australia (RBA) – is due to meet on Tuesday in its first meeting this year. Its last meeting in December 2012 saw a 25 basis point cut in the official cash rate to a historic low of 3.0%. Market consensus is for the RBA to stay on hold according to a Reuters poll compiled today, showing 22 of 25 analysts expect no cut. We like to think outside the box and with the AUD/USD back below the $1.04 mark in late afternoon trading, we present three reasons that may prompt the RBA into cutting rates next week.

 

  1. Australian producer price index at the final stage of production grew by 0.2% in the December quarter for an annual gain of only 1.0% which was below market estimates. The 0.2% gain in December compares with a 0.6% gain in September. This combined with the CPI read of 2.2% shows that inflation is still not an issue and well within the target band range, which means the RBA has further room to move.

 

  1. Chinese data is improving but continues to remain at sluggish levels. The direction is positive but the extent of the upturn is perhaps a little slower than anticipated. Today’s PMI numbers showed a fall to 50.4 in January from 50.6 in February and with Chinese New Year approaching, there might still be soft numbers for the next two months.

 

  1. Australian Prime Minister Julia Gillard set an election date this week for September 14th – an unprecedented moved which effectively sees the election campaign commence immediately. The RBA will be reluctant to be drawn into the politics of the country and will want to make  necessary adjustments earlier rather than later, particularly given the appointment of the Reserve Bank Governor due to take place after the May budget but before the September election by Treasurer Wayne Swan.

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