Investing.com-- The Reserve Bank of Australia is widely expected to keep interest rates unchanged at the conclusion of a two-day meeting on Tuesday, and is also likely to maintain a hawkish tilt amid caution over potentially sticky inflation.
The central bank is set to keep its official cash target rate at 4.35% after raising it by 425 basis points over the past two years. While it has kept the rate on hold since December, the RBA had warned during its February meeting that it could still raise interest rates further, especially as inflation remained well above its 2% to 3% annual target.
The minutes of the central bank’s Feb meeting had also shown some members pushing for a 25 bps hike.
RBA to hold rates, maintain hawkish bias
While the central bank is not expected to raise interest rates during its March meeting, it is still expected to maintain a hawkish bias, given that it has repeatedly warned on sticky inflation.
“We think the Reserve Bank will be cautious in declaring victory against inflation and may prefer to wait until the annual change in inflation has come back within the band, which we expect in the September quarter 2024 for headline inflation,” analysts at ANZ said in a note.
While consumer price index inflation eased substantially over the past year, as the Australian economy cooled amid high rates, it still remained well above the RBA’s 2% to 3% target range.
The central bank is not expected to shift course until it sees inflation moving further towards its target. Analysts at Westpac also said they only see a change in the RBA’s stance by September, which is when they expect inflation to moderate within the bank’s target range.
But a cooling Australian economy might limit just how hawkish the RBA can remain. Recent data showed gross domestic product grew just 0.2% in the December quarter, as a marked slowdown in private consumption was only mildly offset by strong exports.
How is the ASX 200 expected to react?
Australian stocks recently tracked a stellar rally in their U.S. and global peers, with the ASX 200 hitting a series of record highs earlier in March.
But a hawkish RBA may limit the ASX’s capacity to push higher. The index is likely to fall if the RBA strikes a hawkish stance, given that its proximity to record-high levels still makes it susceptible to profit-taking.
Caution ahead of a Federal Reserve meeting later this week is also expected to limit any major moves in the ASX.
Australian dollar to benefit from hawkish signals
The Australian dollar (AUDUSD) eased in recent sessions amid concerns over China and pressure from a stronger greenback.
But the currency is expected to benefit from any hawkish signals from the RBA, given that high Australian interest rates help offset pressure from a stronger dollar.
Still, any big moves in the Aussie will be largely held back by uncertainty before a Fed meeting later this week.