The Reserve Bank of Australia holds its first monetary policy meeting of 2018 tomorrow and, whilst no policy change is expected, traders are particularly interested in the central bank’s response to the weak Q4 CPI print.
There had been hopes that the indicator would nudge its way back within RBA’s 2-3% target band, yet as both broad CPI and trimmed-mean CPI fell short of consensus, expectations for a 25bps hike have been pushed back to 2019.
The impact of softer CPI can be seen on the implied yield curve chart, where markets now see February as the earliest window for a hike. Leading up to the data release, December was tipped to mark the RBA’s first hike since November 2010, while there was a 50% chance of it occurring in November.
In tomorrow’s statement, any comments surrounding the exchange rate could also warrant close attention. In November’s statement the RBA reiterated that a higher currency “would be expected to result in a slower pick-up in domestic economic activity and inflation than currently forecast.”
We have seen the RBA alter its tone and wording surrounding the exchange rate as AUD has traded higher in the past. And when you consider the broad gains the Australian dollar exhibited between mid-December 2017 and the end of January 2018, the RBA may try to jawbone the home currency.
