• Jim Vrondas, Chief Currency Strategist Oz Forex : The RBA often annualises a consumer price inflation over a rolling six month period in order to get a sense of the trend in prices. Measured this way inflation in the second half of 2013 increased to an annualised rate of 2.9%, up from 2% six months prior and higher than the headline 2.7% reading. Such a sharp rise puts it at the top end and only just inside the RBA’s band which is sure to make them feel more than a little uncomfortable. Higher inflation also threatens to send the Aussie dollar higher so the RBA has a battle on its hand.
• “The Fed delivered Glenn Stevens a great Christmas present in the form of tapering and a lower Aussie dollar,” said Paul Bloxham, chief Australia economist at HSBC Holdings Plc in Sydney and a former RBA economist. “Inflation is picking up more than the RBA expected and I suspect the aggressive campaign to jawbone the Aussie dollar lower that we saw in the tail end of last year might have come to its end.”
• “The Aussie decline has done some of the RBA’s work for it,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney. “When you look at the way the currency has headed and the recent inflation data, I think the most likely course is for the RBA to be on hold for the foreseeable future.”
• Saul Eslake, chief Australia economist at Bank of America Merrill Lynch in Melbourne, predicts unemployment will rise to 6.5 percent by the end of the year — a 12-year high. “The actual unemployment rate is significantly worse than official figures suggest,” Eslake wrote in a research report last week, referring to the decline in participation. “The RBA may be getting behind the curve on labor market weakness.”

• Commonwealth Bank of Australia economist Michael Workman thought the RBA would acknowledge the emerging-markets turmoil: “I think they will definitely refer to it because it comes from the Fed in the first place … It began last May when the Fed first indicated that they would be ­withdrawing that stimulus which is effectively very cheap liquidity to global markets. You’ve got this problem now with some emerging markets where it’s likely to keep causing disruptions to them. And that’s important for ­volatility measures.”
• Citigroup economist Paul Brennan thinks the RBA might include a passing reference (to the emerging market ructions) but the central bank has the capacity to go into more detail with ­Friday’s statement on monetary policy. “I think they will be taking a more positive stance but they could say, ‘despite risks coming out of the developments in emerging markets, the overall outlook for global growth has improved in recent months’ ” he suggested

• On expectations the RBA could drop its easing bias, BNP Paribas: “That may lead rate markets to reconsider pricing in a future rate hike”

• Westpac senior currency strategist Imre Speizer: “A switch in stance from easing to neutral is widely expected.”
• Westpac senior currency strategist Sean Callow: RBA’s statement today will have to include some new language on inflation and AUD (because any drop in easing bias may not be evident in the statement today and we will have to wait until Friday SoMP). With the fall in AUD since the December meeting, the RBA may find it hard to justify “uncomfortably high” description for the exchange rate and this may be dropped or at least watered down, he says. “But we may still hear that a weaker AUD is “likely to be needed to achieve balanced growth”, more of a long term comment. AUD/USD seems likely to emerge somewhat higher after the statement, but Friday’s SoMP seems the bigger RBA event for the week”

• Goldman Sachs have policy rate unchanged at 2.50%
• Citi expects the RBA Board to reiterate that it, ‘will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target,’ thereby leaving the door open to additional interest rate easing. …relative to hawkish market lean this may come as a dovish surprise and risks triggering renewed AUD weakening. Altogether, we view the rally in pairs such as AUDNZD in recent days as an opportunity to reload short positions on the crosses, with tomorrow’s policy decision a potential catalyst for a lower AUD.
• Bank of America: The RBA will be on hold at its February meeting… however, we still believe there is a solid case for the RBA to ease rates in 2H as uncertainty as to the prospects for economic growth remains high. For the February meeting we believe economic activity still warrants a slight easing bias to be held. Yet recent inflation figures could see a more neutral stance flirted with. We expect the RBA will need to be careful here as it will not want to give the A$ any upward momentum by altering its tone significantly. This is especially true as it looks to talk the exchange rate down further. The RBA’s view on the recent spike in inflation will be important. If it is content to look through recent data as a temporary spike then it should be free to ease rates in 2H. Yet if it is viewed as more permanent it may give it much less room to move. With our forecast for the A$ at US$0.88 we currently take the former.
• Barclays: This week’s RBA meeting is likely to provide some support to the AUD in the context of extremely short AUD/USD speculative positioning. We expect the RBA to leave its policy rate unchanged at 2.50% (consensus: 2.50%; market pricing a 4% chance of 25bp cut) and to also drop its weak easing bias given higher inflation and signs that earlier rate cuts are boosting growth outside the mining sector (Figure 6). This is likely to be confirmed in its Statement on Monetary Policy (Friday) where the RBA should raise its near-term inflation forecast for Q2 2014 from 2.5% to 2.75%.
• Credit Agricole:We expect the central bank to leave the policy rate on hold at 2.50%. Talk of a rate cut has resurfaced again in recent weeks after the December employment report came in disappointing, but we think that such talk is again over-reacting. A pick-up in the inflation rate to 2.7% YoY in Q4 showed that the room for more easing is very much limited and we continue to think that the easing cycle already finished in August last year. AUD’s relatively subdued performance recently will also mean less incentive for the RBA to ease. All in all we see a status quo from the RBA for some months to come.
• Commerzbank: Given the rather mixed data lately, the RBA is likely to leave the key interest rate at 2.5% this week. While disappointing growth in the third quarter and a weak labour market report had fuelled hope of rate cuts, this was then dampened by the surprisingly sharp rise of inflation in the fourth quarter. Moreover, the latest corporate survey is unexpectedly positive, probably also because of the weaker AUD. The RBA will welcome the latter, after repeatedly saying that the overvalued AUD is hindering a revival of the economy beyond the mining sector. That said, if the AUD depreciates further, this will push up import prices and inflation and create a dilemma for the RBA.
• NAB says their measure of “fair value” for the AUD is at 0.9150