What to expect from the RBA this Tuesday?

Australian’s weak inflation report this week has set the tone for the RBA’s Rate Statement next Tuesday. The underlying inflation reading remains well below the RBA’s target 2-3% for the 11th consecutive quarter. There is no doubt that the Australian inflationary outlook remains feeble. Some cyclical and structural headwinds are preventing wages and other inflationary pressures to climb higher.

Even though the economy is on its 27^th year without a recession, the Australian economy is trapped with very high household debt. A subdued wage growth and high household debt are putting a squeeze on consumer spending. It is hard to see consumer spending continue to stay strong in the upcoming quarters.

There are some bright spots such as net exports, public spending and capital expenditure that are relatively solid to stimulate the economy but there are no signs of significant inflationary pressures from leading indicators across categories in the near-term for the RBA to increase interest rate.

“Patience is the key here.” Unemployment rate is coming down gradually and will eventually push wages higher at some point. Therefore, even though the CPI figures were disappointing, it is too early to speculate about a rate cut or any changes for that matter. The RBA was expecting both headline and underlying inflation to undershoot under their target range.

We therefore expect the RBA to maintain its usual stance on inflationary outlook and keep interest rate on hold.