RBA Preview – Keeping Powder Dry on Mixed Data and Omicron Uncertainty

The RBA is widely expected to leave the cash rate unchanged at 0.1%. Given the mixed economic data flow since the last meeting, the uncertainty of the Omicron variant and the scheduled discussion about asset purchases in February, policymakers would stand pat at the upcoming meeting. They would also reinstate that a rate hike next year is unlikely.

The economic data flow has been mixed since the last week. GDP contracted -1.9% q/q in 3Q21, after growing +0.7% in the prior quarter. This, however, exceeded consensus of -2.7% contraction. From a year ago, GDP expanded +3.9%. While much weaker than +9.6% growth recorded in the second quarter, the reading came in better than consensus of +3%. Inflation stabilized with headline CPI easing to +3% y/y in 3Q21 from a decade-high +3.8% a quarter ago. While the trimmed mean inflation rate, soared +2.1% y/y in 3Q21, from +1.6% in the prior quarter, it has largely stated within RBA’s inflation target range.

On the job market, the unemployment rate surprisingly rose +0.6 ppt to 5.2% in October, worse than consensus of 4.8%. The number of fulltime jobs sank -40.4K during the month. The participation rate increased to 64.7% from September’s 64.5%. This came in slightly lower than consensus of 64.8%.

We expect the mixed data and increasingly uncertain outlook brought about by the Omicron variant would support the RBA’s stance to keep the monetary policy on hold. Moreover, the central bank last month noted that a decision on the weekly pace of the bond purchase program will be made at the February meeting. Policymakers should find it more appropriate to leave things as they are and reiterate the forward guidance that conditions for rate liftoff are not expected to be met before “the end of 2023”.