Will it or won’t it? – Commerzbank

Tomorrow morning, the Reserve Bank of Australia (RBA) will decide on its key interest rate. The market is pricing in a rate cut of 25 basis points to 3.85%. Hard to be sure whether this step will actually come, as some developments are likely to cause the RBA headaches, Commerzbank’s FX analyst Antje Praefcke notes.

RBA can leave its key rate unchanged at 4.10%

“The labor market is proving stronger than the RBA would like. Job creation is above the long-term average and, despite the interest rate hikes following the inflation shock, the unemployment rate remains rather low at 4.1%, with the employment rate rising at the same time. Wage pressure is showing correspondingly few signs of weakness. In general, inflation showed no further signs of falling in the first quarter. Similar to other countries, prices for services continue to rise.”

“The continued robust labor market and slightly higher-than-expected inflation actually argue in favor of a pause and against an interest rate cut. At the same time, the tariff dispute between the US and China has eased somewhat, so that the argument for a preventive interest rate cut out of concern about economic weakness in Australia, as China’s important trading partner, has now lost momentum.”

“In this respect, we would not be surprised if the RBA leaves its key rate unchanged at 4.10% tomorrow. If the RBA decides for a pause, the AUD could gain ground again in the short term. However, we remain skeptical about the AUD in the medium term, as it is likely to suffer from the economic weakness of its important trading partner China and low growth potential.”