RBA preview December: rates to remain unchanged, hawkish tone to taper

Investing.com-- The Reserve Bank of Australia is widely expected to keep interest rates unchanged in December, although recent signs of cooling Australian economic growth are expected to temper the bank’s hawkish tone. 

The RBA is widely expected to keep its benchmark cash rate at 4.35%, and is unlikely to provide any direct cues on plans to begin easing rates.

But the central bank is expected to temper its hawkish stance in light of third-quarter gross domestic product data that showed a sharp cooling in Australian economic growth. 

GDP also missed the RBA’s forecasts.

Softening growth could see the RBA strike a less hawkish tone on its outlook for interest rates, opening the door for an eventual easing cycle in 2025. Market consensus is for the RBA to begin cutting rates from the second quarter. 

Analysts at ANZ said the RBA was likely to reiterate its focus on bringing down inflation. But they noted that any mention of the bank’s recent comments on policy needing to be forward looking and for rates to remain unchanged would signal a “less hawkish stance.” 

ANZ and Australian peer Westpac both pushed forward their expectations for the RBA’s first rate cut to May 2025 from March 2025, citing concerns over sticky inflation. 

Both banks also expect the RBA to enact a shallow easing cycle in 2025. 

During its November meeting, the RBA left rates unchanged and said bringing down inflation remained its top priority, stating that it was not “ruling anything in or out.”

Inflation has remained a major sticking point for the central bank, having remained well above its 2% to 3% annual target for over two years. While headline consumer price index inflation was seen easing in recent months, underlying CPI has remained sticky.

How will the ASX 200 react?

Australian stocks recently surged to record highs on hopes that expansionary policies in the U.S. and stimulus measures in China will spur increased demand for commodities. A broader pivot into economically sensitive sectors also aided the ASX 200. 

A less hawkish stance from the RBA is likely to spark more strength in Australian stocks, although gains may be tempered by heightened concerns over cooling growth in the country, especially if the RBA notes the disappointing third-quarter GDP data. 

How will AUD/USD react? 

The Australian dollar was battered by concerns over cooling economic growth, with the AUDUSD pair coming close to lows last seen 13 months ago.

The prospect of RBA rate cuts is likely to spur further weakness in the currency, especially if the central bank strikes a less hawkish chord in its final meeting for 2024. 

Conversely, the AUD could see some near-term relief if the RBA downplays expectations for rate cuts.