The Reserve Bank of Australia (RBA) is virtually certain to keep its cash rate on hold at 4.75% on Tuesday. Low inflation, sluggish household spending, and the uncertainty created by the recent natural disasters are likely to keep the RBA on the sidelines for a while. Nonetheless, business investment is set to surge at a time when spare capacity in the economy is already low. We expect the RBA to resume its policy tightening in August, and believe that the cash rate will rise by more than the markets anticipate.
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