RBA to err on the side of caution

My guess is the Reserve Bank will opt to keep the official cash rate on hold when the Board meets later today.
With inflation sitting quite low, the reserve Bank has scope to cut the official cash rate if it needs to, but will more than likely err on the side of caution and leave rates on hold at 3.5 per cent for another month.

The unemployment rate remains low at 5.1 per cent, in addition, commodity prices have bounced back a little bit in recent weeks, removing the need for an imminent rate cut.

I see the RBA on hold, though it is a close call.
I still expect a cut before year-end 2012 – likely in November – though this is conditional on a low Q3 underlying CPI print and indicators for China continuing to be below trend. A pick-up in China could obviate the need for further loosening in Australia.

I have in mind that the RBA is a lot closer to the end of its easing cycle than markets are currently pricing in, with markets currently pricing in 100bp of cuts over the next year.


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