Economists are assessing whether the RBA will stay in tune with the global shift towards tighter monetary policy settings and adopt a more hawkish tone this week.
The Reserve Bank of Australia's monetary policy setting committee meets on Tuesday, and economists and traders agree that governor Philip Lowe will not move the central bank's cash rate target from a record low of 1.5 per cent.
But a series of updates last week from central banks in Europe, the United Kingdom and Canada, among others, suggested that policymakers beyond the US have turned their minds to unwinding the extraordinary monetary stimulus that has characterised the post-GFC landscape.
The RBA appears set on maintaining rates at current levels, having cited the countervailing forces of a strong labour market on the one hand and heavy household indebtedness and subdued wage growth and inflation on the other.
But Deutsche Bank economist Adam Boyton wonders whether the central bank could spring a "July surprise" on Tuesday.
"With the labour market showing signs of improvement, we think the RBA could join the chorus of hawkish central banks in [this] week's post-meeting statement," Mr Boyton said.
Mr Boyton added he continues to expect rates will remain steady this week and this year but also noted the potential for Mr Lowe to shift his tone in the accompanying statement to the central bank's rate decision.
Hawkish direction
"On balance, it is probably too soon for the RBA to shift the policy assessment from the neutral tone in June, although if there are shifts these can, in our view, only be in the hawkish direction," he said.
Australia's unemployment rate has declined sharply over the past two months to stand at 5.5 per cent, its lowest since 2013. Yet measures of "underemployment" – workers who would like to work more but are unable to – "remains close to all-time highs and points to excess capacity", JP Morgan economist Tom Kennedy said. This suggests "wage recovery remains a distant prospect".
"Australia's labour market data remain mixed and difficult to decipher," Mr Kennedy said, which would tend to reinforce the RBA's preference to maintain a watching brief.
Citi chief economist Paul Brennan said he expects the cash rate will remain unchanged and that the central bank on Tuesday will maintain its neutral bias.
"In our view, tightening by the Fed and possibly other central banks isn't a reason by itself for the RBA to consider raising rates," Mr Brennan said. "This is because the RBA would not want to see additional upward pressure on the Australian dollar.
"More broadly, the backdrop for the Fed raising interest rates has been an economy growing above trend and unemployment dropping to or even below full employment. This stands in contrast to Australia with growth well below trend and unemployment above full employment."
Irrespective of whether the RBA changes its rhetoric, it is expected to hold rates steady this week and over the coming months. Fidelity International head of investment solutions David Buckle believes this could be a mistake, and that the RBA should join the global shift towards tighter policy.
Market distortion
The most recent jump in headline annual inflation to 2.1 per cent has taken the real cash rate firmly negative in Australia for the first time, Mr Buckle said. Negative real rates in overseas markets such as Europe has proved incredibly distortionary for financial markets by triggering a desperate search for yield, and it may have a similar effect here.
"For the first time the RBA is embarking on a path that the Western central banks have been on, and I think those central banks have made a very bad mistake in keeping the real interest rate so negative," Mr Buckle said. "They have effectively taken the risk-free asset away from the investor choice and affected investor behaviour.
"The intent of the monetary policy is to try and encourage people to spend rather than save, but it's actually done the opposite: it has forced people to save more and save more riskily."