The Reserve Bank of Australia (RBA) is widely expected to keep the cash rate on hold in August; however, its next move becomes murky in the face of new global economic data.

The RBA, which will announce its latest interest rate decision on Tuesday, August 6, is expected to keep rates at 4.35 percent.

This followed better-than-expected inflation data released by the Australian Bureau of Statistics last week, with the consumer price index (CPI) rising 1% in the June quarter and 3.8% year-on-year.

Notably, we also saw weaker-than-expected US jobs data last week, fueling fears of a potential US recession and a subsequent broad sell-off in markets.

The S&P/ASX 200 fell more than 3.5% on Monday, August 5, and has fallen 4.1% over the past five years.

Global equity markets also saw significant declines, with the Nasdaq down 3.8% and the Dow Jones down 2.2% during the period.

"A lot can change overnight in the world of central banks, and what we've seen happen over the past week certainly speaks to that," said Scott Solomon, co-portfolio manager of T. Rowe Price Dynamic Global Bond Strategy.

“Markets saw an almost 50% chance of a hike by the RBA before the end of the year completely reversed, with markets now pricing in an almost 100% chance of a cut before the end of the year.

"There was a boost from the great CPI print earlier, but with global economic data disappointing across the board, it looks like nothing can stop the bearish train."

He suggested inflation could fall to the desired range around a quarter ahead of the RBA's current estimates, with a potential rate cut before the end of the year.

"While we don't expect Governor Michelle Bullock to commit to cuts, it's unlikely she'll do much to counter them." The rest of her global central bank colleagues are gloomy – peer pressure is hard to avoid,” Solomon said.

Richard Yetsenga, group chief economist, ANZ, said the RBA's tone would be watched closely for signs of a shift from hawkish views.

"The RBA, I think they're still going to sound a bit hawkish, which may, I suspect, clash a bit with pricing in the market at the moment, but I think it fits the data that's out there in Australia at the moment and the trend that is there," he said.

"I think over the next few months you will see a bigger shift in the way the RBA characterizes the economy and the inflation cycle to become more dovish and start to lay the groundwork for the RBA also, ultimately, joining the global relief cycle. But right now our forecast is that it won't start in Australia until February next year.

Yetsenga added that financial markets pricing in a rate cut by the end of the year were probably getting ahead of themselves, pointing out that "less than 10 trading sessions ago the market was pricing in the RBA to go higher".

"I think it's too early for the RBA to move away from at least talking about some prospect of a hike to turn around and actively ease," he said.

GSFM investment strategist Stephen Miller also believes the current market climate is unlikely to cause the RBA to deviate from course.

"Australian inflation - which has been better than feared and I think that's the operative word - is still above the RBA's forecast and the unemployment rate is around the RBA's forecast," he told InvestorDaily.

However, the maximum reaction to be expected in light of recent events could be a more neutral tone from the bank, he said.

"I certainly don't think the RBA will react in any way to what we're seeing, the maximum impact we can expect is that they may express an overtly neutral bias, whereas they have been reluctant to do so in the past," , Miller said.

"They are hinting at it, but they're kind of saying, 'We've discussed an increase, but not a decrease,' whereas this time it might be more even." But I can't see them cutting rates and I think it would be unwise for them to do so.

Instead, Miller predicted that a rate cut would most likely occur in early 2025, although he acknowledged that it was not "unbelievable" to see such a cut by the end of the year.

“If I had to pick the most likely time, it would be February 2025. The reason I say that is, again, the inflation numbers were not as bad as we feared, but it's a mistake to characterize them as good or benign in any way," he said.

“The RBA's February forecast was exceeded in March, the May forecast was exceeded in June and that was true for those numbers as well when we look at the trimmed average. Inflation is still very sticky.

The trifecta of a lower policy interest rate and unemployment rate than developed countries, along with a higher rate of inflation, means the RBA "is likely to be one of the last to start cutting rates", Miller added.

Did central banks wait too long?

Responding to concerns that central bank policy may have been too restrictive over the past few years, leading to an economic slowdown, the investment strategist pointed out that fears of a recession have been simmering in markets for about two years, "and it hasn't happened'.

"Central banks have held rates for a long time, but I will also say this -- the markets have been getting central banks wrong for two to three years now and central banks have been right," Miller told InvestorDaily.

"I hear people say that central banks are behind the curve and so on, but I just remind them that that's been the mantra for the markets for the last two or three years, and certainly for most of it, it's been wrong." I'm not saying it's not wrong now, but the markets have shown a tendency to over-expect a recession.

He pointed out that markets had enjoyed a "phenomenal" rally in the first half of the year, especially in risk markets, and the latest US economic indicators were a shock to that momentum.

"I didn't think the U.S. job numbers were great, but I didn't think they were a disaster," he said.

"[They’re] probably not inconsistent with the range of expectations that the Fed was thinking about, the unemployment rate was a little bit higher, but that was largely because the participation rate was a little bit higher, so I don't think we should be getting too a lot [worked] on unemployment numbers.

Looking at the market's recent swings, Miller continued: “Of course, market movements have been quite volatile, but that's largely because the markets have been judged to perform quite favorably.

"So if there are particles that lead to some doubt about that, whether it's a slightly weaker jobs report, tensions in the Middle East, I think sometimes they can have outsized impacts."