Reserve Bank likely to keep freeze on rates
The Reserve Bank is unlikely to budge from its neutral interest rate stance next week, but it may ramp its easing bias up a notch.
All 14 economists surveyed by AAP expect the RBA to keep the cash rate unchanged at its February meeting on Tuesday, and eight expect them to remain on hold for the rest of the year.
The central bank cut its interest rate by a quarter of a percentage point last February and again in May, taking the cash rate to a new record low of 2 per cent.
Markets are pricing in about a 4 per cent chance of a rate cut next week, although one is fully priced in by July.
The RBA faces a trade-off be- tween its desire to boost growth, to keep inflation in check, and the risks that lower interest rates could pose to financial stability, HSBC chief economist Paul Bloxham said.
“Australia’s labour market continues to show signs of improvement, which should keep the RBA on hold for now,” he said.
“However, inflation is low and forecast to stay subdued, leaving the RBA with scope to cut further.”
The December quarter CPI figures show that the RBA’s preferred measures of underlying inflation just scraped in at the bottom of the bank’s 2 to 3 per cent target band.
With growth tipped to run below trend for a fourth consecutive year, HSBC expects underlying inflation to drift below the target band.
“We expect low inflation to drive a further cash rate cut in quarter two, unless the Australian dollar sees a tangible fall before then,” Mr Bloxham said.
While AMP Capital chief economist Dr Shane Oliver does not expect the RBA to cut rates on Tuesday, he does think the bank will strengthen its easing bias.
“It’s doubtful that the latest bout of financial and commodity market turmoil has been enough to move the RBA out of its chilled-out state just yet,” he said.
But global jitters and falling commodity prices combined with sluggish domestic growth, tepid inflation and slowing momentum in the housing sector will reinforce the RBA’s dovish outlook, he said. AAP
The Reserve Bank is expected to keep its cash rate on hold next week.