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RBA: what to expect?

Australian dollar remains under pressure ahead of the Reserve Bank of Australia meeting on Tuesday (4:30 GMT). Most of the economists expect the central bank to keep the cash rate at its historical low of 2.5% even despite the recent AUD strength and unemployment growth. According to Credit Suisse, financial markets are pricing in only a 7% chance of a cash rate cut. However, the market will be closely watching the RBA statement for any indication of RBA’s view on monetary policy and the property sector. Note that economists of the most major banks still expect to see a rate cut in Q4 2013.

The previous RBA rate cut was seen in August. The RBA governor Glenn Stevens has noted then that Australia's growth is expected to stay slow at least in the next year. However, he has mentioned that policy easing started in November 2011 has injected considerable stimulus into the economy, which is still having a positive effect.

It is important to understand that the Australian regulator now needs to balance between the problems of high national currency and a "bubble" forming on the housing market. Citigroup analysts note that adding stimulus now would be the same as “further fuelling the fire under the property market".

According to UBS analysts, RBA is very likely to keep rates unchanged for several months. However, a fall in inflation to below 2% and a rise in unemployment above 6% would shift the short-term outlook towards a cut. TD Securities analysts agree that the RBA is likely to stay on hold, but add that the regulator will give some dovish hints on the future prospects of the cash rate. The market evaluates the prospects of a rate cut in November significantly higher than in October. 

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