RBA set to hold rates this week, but what’s in store for the rest of the year?

The Reserve Bank of Australia (RBA) is due to meet to determine what to do with interest rates on Tuesday for the first time this year.

As was anticipated, the RBA kept its official cash rate at 4.35% at its last meeting in 2023. The decision provided Governor Michele Bullock's central bank the opportunity to evaluate the effects of earlier rate rises for a couple of extra months.

The meeting this week takes place at a pretty interesting time, because the Australian Bureau of Statistics just disclosed last week that inflation eased further in the December quarter. As a result, the market now anticipates that the RBA's next rate action will either be a hold or a reduction rather than an increase. Music to the ears of mortgage holders.

If the market has all but priced in a hold this week, what are the experts saying about the next rate cut? Furthermore, given there have been some pretty disastrous monetary policy predictions in the last couple of years, how much notice should we give to them? Let's take a look.

What’s happening with Inflation and Sales?

Inflation in Australia came in at 4.1% year over year in the final quarter 2023, lower than 5.4% in the third quarter and below the 4.3% predicted by the market. For the fifth quarter in a row, goods inflation dropped, this time to 3.8% from 4.9% in the third quarter. Also, for the second consecutive quarter, services inflation slowed to 4.6% from 5.8%, resulting in the lowest rate since the fourth quarter of 2021. Food, housing, health, transportation, leisure & culture, education, and insurance & financial services were among the notable categories where inflation reduced.

In the meantime, after a 5.2% growth in the third quarter of 2023, the RBA's preferred Trimmed Mean CPI climbed by 4.2% year over year, the least since the first quarter of 2022, although it remained below the central bank's target range of 2-3%.

The effect of high interest rates and high inflation can be seen in the most recent Retail Sales data also released last week. Sales fell by 2.7% month on month in December 2023, worse than market expectations of a 1.0% decrease and after a downwardly revised 1.6% increase the previous month. It was the sharpest dip in retail sales since August 2020, as shoppers moved part of their December spending to November to take advantage of Black Friday deals.

How’s the Labour Market?

The unemployment rate in Australia remained unchanged in December, but businesses cut around 100,000 full-time positions as a result of the negative effects of increased interest rates on the economy.

The Australian Bureau of Statistics said this month that the unemployment rate for December was 3.9% after adjusting for seasonal factors. The last reported rate for November was also 3.9%, which was generally predicted by the market.

What caught everyone off guard was that 65,000 jobs were lost in December, when the market had anticipated 15,000 more. So things are definitely slowing down. The Reserve Bank predicted in November that by the end of 2024, the unemployment rate will have increased to around 4.25%.

What to expect this year

Westpac, in its weekly report on February 2nd suggested that it is doubtful that the RBA would increase rates again this cycle and that the data flow since November has indicated that the cash rate will remain on hold this week. While a reduction in interest rates is not in the cards anytime soon, Westpac does anticipate a drop in 2024, but no sooner than September.

The chief economist of IFM, one of the biggest asset managers in the nation, predicts that Australia's central bank won't start lowering interest rates until late 2024 since prices will probably stay constant for some time. Mr Joiner suggested it was ambitious that some were predicting the first rate reductions will occur around the middle of 2024.

Adam Boyton, ANZ's head of Australian economics, suggested recently that the Q4 CPI numbers confirmed no adjustment in interest rates at the RBA's February 2024 meeting. However, although risks are shifting towards an earlier start to a future easing cycle, the ANZ is not ready to change its projection of the first rate reduction coming in November 2024 just yet.

The AUD/USD outlook

The AUD/USD currency pair has exhibited a downward trend since December 28th, 2023, when it reached its peak at 0.68707. While it remained within the green Ichimoku cloud from mid-January until the end of the month, it has been trading below the cloud since the beginning of February coinciding with a downward movement in the RSI indicator, which has dipped below the 50-level.

As of now, the pair is fluctuating around an important price threshold of 0.64980. Should the downtrend persist, traders will focus their attention to the next support levels at 0.63962, 0.62868, and 0.61944.

Some traders may identify a possible head-and-shoulders price pattern taking shape on the daily chart since November 19th, 2023, with the neckline aligning closely with the current level of 0.64980. This pattern traditionally indicates a reversal, implying a potential decline in the AUD/USD. In the event of prices breaking below the neckline and accelerating downward, the projected price target would approximate the last support level mentioned earlier at 0.61944.

According to the sentiment indicator on the ActivTrader platform, 74% of traders using the broker’s platform powered by TradingView are bullish on the pair, holding long positions. In the event of a potential price reversal, resistance levels to monitor include 0.66017 and 0.66913.


AUD/USD Daily Chart - Source: ActivTrades’ online trading platform