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This week in Asia Pacific: RBA expected to cut rates further

Brendon Thorne | Bloomberg | Getty Images

Australia is set to take the spotlight in a data-heavy week in Asia Pacific, with its central bank set to meet while companies in the country begin reporting their earnings.

The Reserve Bank of Australia is widely expected to cut interest rates during its August policy meeting on Tuesday to support the economy, after the latest round of data showed headline prices Down Under remained well below the central bank's inflation target.

"We maintain our view that the RBA will ease in August, not only to support inflation but also to improve future growth prospects in light of a weak labor market," said Bank of America Merrill Lynch economists Alexandra Veroude and Tony Morriss in a note on Thursday.

In the June quarter, the consumer price index increased 0.4 percent after a quarterly decline of 0.2 percent in March. On-year, the inflation rate decelerated to 1 percent, compared to the 1.3 percent rise in the twelve months to the March quarter of 2016.

"Headline CPI is at the lowest annual rate since March 1998 and core inflation is now the weakest rate in the history of the series," said Veroude and Morriss.

Goldman Sachs analysts also expect the RBA to ease interest rates at its August meeting. However, the analysts pointed out one data point that could offer the case against a near-term rate cut - the 0.5 percent on-quarter increase in the trimmed mean measure of inflation, taking the annual rate to 1.7 percent on-year.

It was "slightly above the RBA's forecast for underlying inflation," the Goldman analysts said, but added the weighted median measure of inflation was below the central bank's forecast for underlying inflation.

Underlying inflation is derived by taking the average of the trimmed mean and weighted median measures of inflation.

In its May policy statement, RBA forecasted underlying inflation to be between 1 and 2 percent in 2016 and then within 1.5 and 2.5 percent by June 2018.

RBA last cut its interest rates to a new record low in May, when it slashed its cash rate by 25 basis points to 1.75 percent in a bid to achieve its inflation target of 2 to 3 percent over the cycle.

Investors will also look to earnings from Australian companies, with a handful of companies due to report this week including Rio Tinto andSuncorp.

"Consensus expectations for 2015-16 earnings are now for an 8 percent decline in profits, driven by a 50 percent fall in resources earnings and a 2 percent fall in bank profits, leaving profits in the rest of the market up just 1 percent," explained Shane Oliver, head of investment strategy and chief economist at AMP Capital.

Oliver said the stabilization in iron ore and oil prices would likely provide improved conditions for resources producers. Other key themes set to dominate earnings season Down Under include "ongoing cost cutting; continuing headwinds for the banks; and an ongoing focus on dividends," he added.

On tap this week

Tuesday

Australia - June trade, building permits, 9:30 a.m. HK/SIN

Australia - Reserve Bank of Australia rate decision, 12:30 p.m. HK/SIN

Hong Kong - June retail sales, 4:30 p.m. HK/SIN

Earnings - Honda, Mitsubishi, Sega Sammy, KDDI, Itochu, Kagomi, Sembcorp Industries, Hutchison Telecom

Wednesday

China - Caixin Services PMI, 9:45 a.m. HK/SIN

Japan - Bank of Japan meeting minutes, 7:50 a.m. HK/SIN

Thailand - Bank of Thailand monetary policy decision, 3 p.m. HK/SIN

Earnings - HSBC, Standard Chartered, Rio Tinto

Thursday

Earnings - Toyota Motor, NOL, Fraser & Neave, Suncorp

Friday

U.S. - July nonfarm payroll

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