Will they or won't they? RBA cash rate in focus this week

John Phillips | Digital Editor | CNBC

After the U.S. Federal Reserve and the Bank of Japan kept their monetary policies unchanged in the previous week, investors will be closely watching the Reserve Bank of Australia (RBA), with some expecting a possible rate cut on the back of weak inflation data.

The central bank is due to release its decision at 12.30 p.m. SIN/HK Tuesday.

Latest round of data released by the Australian Bureau of Statistics showed consumer prices unexpectedly fell 0.2 percent in the first quarter compared with the December 2015 quarter. Annual inflation also slowed, rising 1.3 percent in the 12 months to March 2016, compared with a 1.7 percent annual increase in the 12 months through December 2015.

This falls below the central's bank's target inflation rate of 2-3 percent.

"Inflation was not just mildly below expectations, it was dramatically below even the lowest of expectations" of market watchers, according to analysts at Goldman Sachs. "The disinflation was broad based."

"The RBA has long placed its central focus on inflation targeting, with a watchful eye to ensuring financial stability," the Goldman analysts added. "There is now little question that inflation is sufficiently low to justify an easing."

"We think that the RBA should, and most likely will, cut the official cash rate by 0.25 percent, taking it to 1.75 percent when it meets on Tuesday," said Shane Oliver, head of investment strategy and chief economist at AMP Capital.

Oliver explained that a combination of global deflationary pressures, soft demand at home and very weak wage growth could see inflation remain well below the target for an extended period. It is a risk, he said, the RBA cannot ignore for too long.

A Reuters poll, however, showed majority of market watchers expect the RBA to leave its cash rate unchanged at 2 percent.

Following the RBA decision on Tuesday, Australia will announce its 2016-17 Federal Budget in the evening local time. This will be the government's "main economic statement" ahead of a likely election in July, said Oliver. "Government will want to include some sweeteners."

Australia's AAA sovereign rating could be at stake due to persistent budget deficits.

"The ratings agencies are losing patience," Oliver explained. "We are now looking at a 12-13 year run of budget deficits, which swamps the 7 years seen in the 1990s and the 5 years in the 1980s."

Fitch Ratings said in March that a sustained widening of the fiscal deficit without remedial policy actions could imperil the country's debt rating.

Also on tap this week:

Monday, 2 May 2016

No major economic data due

Tuesday, 3 May 2016

Australia - Reserve Bank of Australia monetary policy decision

Australia - 2016-17 Federal Budget

China - Caixin Manufacturing PMI

South Korea - April Consumer Price Index

Wednesday, 4 May 2016

New Zealand - Jobs report

Thursday, 5 May 2016

Australia - March Foreign Trade

Australia - March Retail Sales

China - Caixin Services PMI

Indonesia - 2016 Q1 Gross Domestic Product

Taiwan - April Consumer Price Index

Friday, 6 May 2016

Malaysia - March Trade Data

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