RBA expected to hike interest rates as inflation picks up
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
The current market positioning suggests that a 25 basis points (bps) increase to the Reserve Bank of Australia’s Official Cash Rate (OCR) is fully baked on Tuesday. The decision will be announced at 03:30 GMT, with the RBA expected to lift the interest rate from 4.10% to 4.35% after a four-month hiatus from the tightening cycle.
Next release: 11/07/2023 03:30:00 GMT
Christopher Kent, the RBA’s assistant governor of financial markets, had said at a Bloomberg event in early October, the board “may need to raise interest rates in the future to bring inflation down. I think that’s a reflection of the fact that we wouldn’t want it to be much slower.”
A closely-watched measure of core CPI, the trimmed mean, rose 1.2% in the third quarter, topping expectations of 1.1%. Meanwhile, Australian Retail Sales rose for the first time in four quarters in the July-September period, rebounding 0.2% QoQ as against the previous drop of 0.6%.
Bullock had mentioned last month, “[the RBA’s] board will not hesitate to raise rates if there is a material upward revision to the inflation outlook.”
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
Despite signs of a cooling Australian labor market, robust consumer spending supports the case for the RBA to resume interest rate hikes. Commenting on the inflation data, Reserve Bank of Australia (RBA) Governor Michele Bullock said that goods prices are coming down but services inflation remains persistent. “Services inflation is higher than what we are comfortable with,” she said.
The central focus of the RBA meeting will be on whether Governor Michele Bullock sticks to the recent hawkish rhetoric, hinting at further interest rate hikes.
Reserve Bank of Australia set to resume interest-rate hikes
Amidst increased expectations of an interest rate hike, the Australian Dollar (AUD) is likely to witness big moves on the RBA policy announcement. Traders will closely scrutinize the RBA policy statement for its language, signaling whether Governor Bullock keeps the door open for more rate hikes.
“Aussie buyers need acceptance above 100-day SMA at 0.6511 on a daily closing basis to initiate a meaningful recovery toward the downward-sloping 200-day SMA at 0.6618. The next upside barrier is seen at the 0.6650 psychological level. On the downside, static support aligns at 0.6450, below which a test of Friday’s low of 0.6419 cannot be ruled out. Further south, the 50-day SMA at 0.6395 could come into play.”
Australia RBA Interest Rate Decision
Data from the Australian Bureau of Statistics (ABS) showed the Consumer Price Index (CPI) rose 1.2% in the third quarter, above market forecasts of 1.1% and up from a 0.8% increase the previous quarter. For September alone, the CPI rose 5.6% year-on-year, up from 5.2% in August.
RBA Interest Rate Decision is announced by the Reserve Bank of Australia. If the RBA is hawkish about the inflationary outlook of the economy and rises the interest rates it is positive, or bullish, for the AUD. Likewise, if the RBA has a dovish view on the Australian economy and keeps the ongoing interest rate, or cuts the interest rate it is seen as negative, or bearish.
The big four Australian banks, ANZ, CBA, Westpac and NAB, revised their call for an RBA rate hike, following the resurgence of inflation and hawkish commentary from the RBA policymakers.
Interest rate in Australia is set to rise by 25 bps from 4.10% to 4.35% in November.
The Reserve Bank of Australia’s Governor Michele Bullock could stick to the hawkish tone.
Volatility could ramp up around the Australian Dollar on Melbourne Cup day.
The Reserve Bank of Australia (RBA) is widely expected to resume tightening when it meets on Melbourne Cup Tuesday, having held the benchmark interest rate steady for four straight meetings.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Previewing the RBA policy decision, analysts at BBH said, “Reserve Bank of Australia meets Tuesday and is expected to hike rates 25 bp to 4.35%. A handful of analysts polled by Bloomberg look for steady rates, while World Interest Rate Probabilities (WIRP) suggest 50% odds. Those odds rise to 75% for December 5 and full priced in for February 6, with odds of a second hike topping out near 35% in Q2 2024.”
How will the RBA interest rate decision impact AUD/USD?
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, notes key technicals to trade AUD/USD on the policy outcome. “AUD/USD is sitting at the highest level in three months, clinging to the 100-day Simple Moving Average (SMA) at 0.6511 ahead of Tuesday’s RBA showdown. The 14-day Relative Strength Index (RSI) has flatlined but holds comfortably above the 50 level, keeping the upside risks intact for the Aussie pair.”