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The Reserve Bank of Australia might not cut interest rates in August.
Warnings of a 'hawkish' policy shift at the Reserve Bank of Australia (RBA) have been sounded by analysts at Bank of America.
Recognising the strengthening domestic data pulse, analysts say the central bank might forgo an interest rate cut in August, which risks wrong-footing a financial market that is prepared for such a development.
BofA's bespoke RBA sentiment tracker has moved into hawkish territory following the RBA's July meeting, where rates were left unchanged at 3.85%.
At the July update, the RBA surprised by keeping interest rates on hold, fostering a rally in the Aussie Dollar. It indicated it remains in a cutting cycle, ensuring consensus expects the July pause simply allows the RBA to digest interim data, ahead of an August cut.
But, BofA's indicator, used as a lead signal for Australian front-end rates, suggests the RBA's August Statement on Monetary Policy might have to reflect a higher inflation path.
BofA sees a risk that the RBA raises its medium-term inflation projections, meaning the RBA has little scope to lower interest rates by much.
"Rising housing market momentum, above-average credit growth, rising job vacancies and declining underemployment are all consistent with our view that policy is only marginally restrictive," says Bank of America.
BofA estimates the neutral nominal rate in Australia is closer to 3.5%, which is not far from current rates and implies there is only one more 25 basis point cut until policy risks becoming stimulatory.
Given the risks of a 'hawkish' shift in RBA guidance, BofA thinks there is a benefit in betting on Australian Dollar gains.
This is because a currency tends to rise when its central bank shifts from being accommodating (cutting interest rates and promising to cut further) into being restrictive (holding or raising rates / committing to maintain current levels).
All eyes turn to the midweek release of Australian quarterly inflation numbers, where a positive surprise would begin to crystallise the adjustment in interest rate expectations that BofA thinks is about to transpire.
"With the market still heavily priced for rate cuts, the risks for the AUD are skewed more towards a higher CPI print this week," says David Forrester, Senior FX Strategist at Crédit Agricole.