The Reserve Bank is likely to hold the cash rate this month, but the soaring Australian dollar is becoming a concern.
All 15 economists surveyed by AAP expect the central bank to keep the cash rate at a record low 2.0 per cent for a 12th consecutive month at its Tuesday meeting.
“The RBA is expected to be on hold next week. Domestic growth is solid, commodity prices have lifted, and global markets have stabilised. There is no pressing need to cut,” HSBC chief economist Paul Bloxham said in a note.
However, the RBA has been increasingly jawboning the strong Australian dollar, presumably due to its potential to dampen growth and inflation.
The central bank has been counting on a weaker dollar to drive the economy’s transition away from mining.
The currency was sitting above 76 US cents on Friday, a 12 per cent rise from a six-year low of 68.27 per cent in January.
In response to a question about whether the dollar was moving out of line with fundamentals last week, RBA governor Glenn Stevens admitted there was a risk “the currency might be getting a bit ahead of itself”.
However, BNP Paribas rates strategist Altaz Dagha said the currency wasn’t a risk to the broader economy just yet.
He also pointed out that GDP and unemployment figures released since the March RBA board meeting were positive.
“We think it is unlikely that the RBA will significantly alter the language around the currency at this stage,” Mr Dagha said in a note.
RBC Capital Markets fixed income strategists Su-Lin Ong and Michael Turner agreed that the RBA’s language on exchange rate wouldn’t significantly change.
But they expected the central bank to put slightly stronger emphasis on low inflation and the scope that it provided to cut rates.
Mr Bloxham said while the RBA would hold rates on Tuesday, there’s was still a strong chance it would ease monetary policy later this year, potentially in the June quarter.
“Given HSBC’s view that global inflation and rates will stay low for some time yet, our central case is that the RBA will cut further,” he said.
“Otherwise, the Australian dollar could rise further, putting more downward pressure on inflation and local growth.”