- Interest rate in Australia is likely to stay on hold at 4.35% in December after November’s hike.
- Reserve Bank of Australia Governor Michele Bullock could leave the door ajar for more tightening.
- The Australian Dollar is set to rock on any surprise in the language of the RBA’s policy statement.
The Reserve Bank of Australia (RBA) is set to pause its tightening cycle once again, leaving the Official Cash Rate (OCR) unchanged at a 12-year high of 4.35% following the conclusion of its December monetary policy meeting on Tuesday. The decision will be announced at 03:30 GMT.
As markets widely expect the RBA to keep interest rates unchanged, all eyes will remain on Governor Michele Bullock’s forward guidance in the policy statement for a fresh directional impetus on the Australian Dollar.
Reserve Bank of Australia to stand pat as inflation resurgence wanes
Amidst a resurgence of inflationary pressures, the Reserve Bank of Australia raised the benchmark interest rate by 25 basis points (bps) from 4.10% to 4.35% in November after keeping it on hold for four straight meetings.
Since then, Australia’s inflation and retail spending have cooled down, cementing the case for the central bank to keep its cash rate unchanged this week. Data from the Australian Bureau of Statistics (ABS) on Wednesday showed its monthly Consumer Price Index (CPI) climbed at an annual pace of 4.9% in October, slowing from the previous increase of 5.6% and below expectations of a 5.2% acceleration. The RBA’s closely-watched measure of core inflation, the trimmed mean, rose an annual 5.3% in October, easing from 5.4% the previous month.
The services inflation, measured by the Wage Price Index, rose 4.0% annually, at the fastest pace since early 2009. The uptick in pay growth was largely priced in by the RBA, as it hiked rates last month. Further, markets believe the surge in wage inflation is caused by one-off factors and is unlikely to be recurrent.
Meanwhile, Australian Retail Sales dropped 0.2% in October on a monthly basis, missing expectations for growth of 0.2% while reversing a 0.9% jump seen in September. Weakening economic indicators justify the expected pause in the central bank’s rate hike cycle.
The main attention, however, is likely to be on the language in the policy statement, especially after the RBA guidance in November was perceived as dovish after Governor Bullock said in the statement, “whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks.” The October policy statement cited, “some further tightening of monetary policy may be required.”
The RBA will likely maintain its cautious tone, awaiting the fourth-quarter inflation report in January to decide on the next interest rate move for its first meeting of 2024 in February. Speaking at the Hong Kong Monetary Authority and Bank for International Settlements High-Level Conference last Tuesday, RBA Governor Bullock said, “the central bank has to be a ‘little bit careful’ with using rates to bring down inflation without lifting unemployment.”
Previewing the RBA policy decision, analysts at TD Securities (TDS) explained, “data has been mixed recently, with a red-hot labor market print but a sizeable retreat in CPI inflation and slowing retail sales. Thus, the RBA may take a cautious approach and keep rates on hold until Feb to reassess after it gets new staff forecasts and the Q4 CPI. We expect little change to the MPS but a hawkish tint may not be surprising after Bullock’s recent remarks.”
How will the RBA interest rate decision impact AUD/USD?
The Australian Dollar’s (AUD) fate hinges on the RBA’s communication on the path forward on the interest rate. Should Governor Bullock explicitly mention that more rate hikes remain on the table, AUD/USD is likely to extend its ongoing uptrend. On the contrary, a dovish pause by the RBA could trigger a meaningful correction in the Aussie pair toward 0.6550.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, notes key technicals to trade AUD/USD on the policy outcome. “AUD/USD has stalled its recent upbeat momentum just shy of the 0.6700 level, the highest level in four months. The 14-day Relative Strength Index (RSI), however, remains well above the midline while flirting with the overbought territory, suggesting that there is room for more upside in the Aussie pair.”
“Aussie buyers need acceptance above the July 31 high of 0.6740 on a daily closing basis to unleash further upside toward the 0.6800 round figure. The next upside barrier is seen around the 0.6850 region. On the downside, strong support is envisioned at Friday’s low of 0.6600, below which a test of the 200-day Simple Moving Average (SMA) at 0.6580 will be on the cards. The last line of defense for buyers is seen at 0.6550.”
Economic Indicator
Australia RBA Rate Statement
Decisions regarding this interest rate are made by the Reserve Bank Board, and are explained in a media release which announces the decision at 2.30 pm after each Board meeting.
RBA FAQs
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.
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.
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 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.
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.