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Should Australia Cut Rates? Markets Are Split

Sunday, 5 May 2013 | 10:28 PM ET
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A Reserve Bank of Australia (RBA) meeting on Tuesday is expected to be one of the main highlights for Asian markets this week, with traders split as to whether the central bank will deliver an interest rate cut to boost economic growth.

The week ahead is likely to be a busy one for regional markets, which also await central bank decisions in South Korea and Malaysia, not to mention key Chinese inflation and trade data and the latest Australian jobs numbers.

In Australia, speculation over a May interest-rate cut has risen after data last month showed headline inflation accelerated just 0.4 percent in the first quarter, well below market expectations for a 0.7 percent increase.

Australia's economy grew a modest 0.6 percent in the fourth quarter from the previous quarter, when it grew 0.7 percent. To bolster the economy, the RBA has slashed interest rates 175 basis points since late 2011. It last eased monetary policy in December and has left rates steady since then.

Most economists expect the RBA to leave its key rate unchanged at 3 percent on Tuesday . Still, traders are positioned for a rate cut, with the swaps market factoring in a 57 percent chance of a cut, according to IG Markets.

(Read More: Rate Cut Talk in Australia: Why the Buzz is Back)

"The past month has seen some softer news regarding the global economy, falls in commodity prices and a range of disappointing data in Australia including various business surveys, building approvals, consumer confidence and job vacancies," said Shane Oliver, head of investment capital at AMP in Sydney.

"So with the response to the rate cuts of the past 18 months proving to be very tentative and the mining investment slowdown now looming close, it would make sense for the RBA to provide a bit more insurance for the economy by cutting interest rates again," he added.

The RBA may not be the only central bank in Asia-Pacific to cut rates when it meets this week, with the Bank of Korea expected to give its economy a boost by lowering rates at a meeting on Thursday.

The rate decisions come at a time when central banks globally have ramped up efforts to shore up flagging economies. Both the European Central Bank and the Reserve Bank of India eased monetary policy last week.

Data Deluge

Australia releases a raft of data, both before and after Tuesday's RBA meeting. Data on Monday showed March retail sales fell an unexpected 0.4 percent from a month earlier. House price data for the first quarter is released on Tuesday and April jobs data are scheduled for Thursday.

This week also sees the start of April economic numbers from China, with trade data due Wednesday, followed by inflation numbers on Thursday. The data could be watched closely as talk grows that China could step in with some stimulus measures following recent signs of economic weakness.

China's official Purchasing Managers' Index, for instance, last week dipped to 50.6 in April from 50.9 in March. A figure above 50 indicates expansion, while a sub-50 number shows contraction.

"China will release the first batch of April data, which will be subjected to close scrutiny following a slowdown of growth and low inflation in the first quarter," said Dariusz Kowalczyk, senior economist at Credit Agricole. "Investors will try to assess whether we are dealing with a permanent, or a one off downward pressure."

China's growth slowed unexpectedly to 7.7 percent in the first quarter , while annual consumer price Inflation eased to 2.1 percent in March from 3.2 percent the month earlier, providing room for more monetary and fiscal stimulus.

(Read More: Will the Fall in New Factory Orders Trigger China Action?)

Developments in Malaysia could also be watched closely after the country's ruling coalition government returned to power following a closely-fought general election on Sunday.

Despite winning a majority, Malaysia's governing coalition suffered its worst-ever election performance. The ruling National Front won 133 seats in the 222-seat parliament, down from 140 in the 2008 election and well below the two-thirds majority that Prime Minister Najib Razak had hoped for.

"It has been the most important election in Malaysia since independence [in 1957] and it has been a tough election," said Colin Chapman, vice president for Asia-Pacific at strategic intelligence firm Stratfor. "Najib now has time to get rid of corruption and cronyism and present a new face to the electorate."

— By CNBC.Com's Dhara Ranasinghe; follow her on Twitter @DharaCNBC

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