RBA unlikely to cut rates tomorrow

In an economic update, HSBC Global Research reported that in a recent speech, Mr Stevens indicated the cash rate will remain on hold tomorrow and has dismissed discussion regarding further easing in February.

"When asked about whether he was 'still content with a two per cent cash rate' or whether the central bank was 'going to surprise us all again next February', he said that, 'February is three months away, we've got Christmas, we should just chill out, come back, and see what the data says'," the update said.

HSBC added that while there is scope to cut rates, the RBA remains reluctant for a variety of reasons.

"With growth running below its trend pace, the unemployment rate still well above its full employment level and underlying inflation at the lower edge of the target band, the RBA has scope to cut interest rates further," the update said.

However, the central bank sees the costs of a further cut as outweighing the benefits. Macro-economic risks, stemming from the US and China in particular, are also acting as a deterrent.

HSBC said that if the US Federal Reserve raises rates in the coming months, a noticeable fall in the Australian dollar could help to lift inflation. Conversely, if the Fed's commentary remains "dovish" and it does not act, the Australian dollar could rise and therefore put further downward pressure on inflation.

Another risk is what the slowdown in China means for commodity prices.

"The RBA has been content with the level of the [Australian dollar] recently, partly because it had fallen in line with commodity prices and partly because there are clear signs that the lower [Australian dollar] is lifting growth," HSBC said.

"If commodity prices were to fall further and the [Australian dollar] rose, this could squeeze local income and become a concern for the RBA."

HSBC also pointed out there will be a "swathe" of local economic data for Australia before February. This includes third quarter GDP data – expected to show solid growth of around 2.5 per cent year-on-year – and labour market figures for November.

"Another critical piece of information ahead of the February RBA meeting will be Q4 [consumer price index (CPI)] print, which is due on 27 January 2016.

"A low CPI print could encourage the RBA to cut further, although the central bank's own forecasts already anticipate underlying inflation of 2.0 per cent year-on-year, so it would take a weak result to surprise the RBA to the downside," the update concluded.

AMP chief economist Shane Oliver said while the RBA will likely keep rates on hold, further easing is needed.

"I lean to the view that further help for the economy will still be needed in the form of another easing at some point as the boost to growth from the housing sector runs its course and non-mining investment remains poor," Mr Oliver said.