RBA expected to leave key interest rate on hold as inflation lingers
- Interest rate in Australia will likely stay unchanged at 4.35%.
- Reserve Bank of Australia Governor Michele Bullock to keep her options open.
- Australian Dollar bullish case to be supported by a hawkish RBA.
The Reserve Bank of Australia (RBA) will announce its decision on monetary policy early on Tuesday. Australian policymakers are widely anticipated to keep the Official Cash Rate (OCR) unchanged at 4.35%. In the March meeting, the RBA moved away from the tightening bias, scrapping references to potential rate hikes from the Board’s statement. As a result, the Australian Dollar (AUD) plummeted.
But much water has passed under the bridge since then. On the one hand, the Monthly Consumer Price Index (CPI) rose 3.5% YoY in March, while on the other hand, the latest wage growth figure indicated persistent upward pressures. Wages increased 4.2% YoY in the last quarter of 2023.
Reserve Bank of Australia expected to remain on hold, but what else?
The RBA is not expected to change the OCR, but market players are concerned policymakers may reinstate the hawkish stance. The uptick in inflation, coupled with a persistently tight job market, spooks away any chance of a rate cut in the near term. In fact, speculative interest is more keen to bet on upcoming rate hikes before year-end than on a reduction of the interest rate benchmark. The idea seems quite logical as the RBA stalled rate hikes well below its main counterparts.
Ahead of the announcement, speculation mounts that Governor Michele Bullock and co. will opt out to reopen the door for additional tightening, with market participants increasingly beating on a rate hike in November 2024.
Governor Bullock noted in the press conference following the March decision that she wouldn’t rule anything in or out, adding that she needs to be confident that inflation is sustainably moving towards the central bank target range of 2%-3%. Indeed, she sounded confident back then, but the optimism diluted as macroeconomic data did not support the loosening case.
The CPI rose 1.0% in the first quarter of the year, according to the Australian Bureau of Statistics (ABS). The same report showed that, over the twelve months to the March 2024 quarter, the CPI rose 3.6%, actually lower than the 4.1% annual rise in the previous quarter. It was the fifth consecutive quarter of lower annual inflation, although the trimmed mean annual inflation held at 4%, still above the RBA’s goal.
Furthermore, analysts at TD Securities noted that the latest employment data from Australia will not prompt the RBA to lower the policy rate anytime soon. “Australian headline employment fell 6.6k in March, softer than the +10k consensus and TD’s +18k f/c. Given the significant increase in jobs posted in February, a much larger giveback could have happened, so the 6.6k drop is not too bad. Driving the negative print was the 34.5k drop in part-time, but full-time rose 27.9k (this is strong) while there were upward revisions to headline and full-time for February.”
Investors have spent most of this year betting on the dates major central banks will trim interest rates, pricing in sooner or later movements. However, that’s not the case in Australia, beyond the 30% odds a rate hike could come in November. Nothing, however, is priced in the country, and Tuesday’s announcement could put speculative interest in a certain path, spurring some aggressive price action around the AUD.
The RBA will include fresh economic forecasts. In February, the central bank was expecting trimmed mean inflation would decline to 3.1% by the end of 2024 and to 2.8% a year later. Inflation was then seen returning to the 2%-3% target by mid-2024. On growth, policymakers forecasted Gross Domestic Product (GDP) growth will slow to 1.3% in the second quarter of the year and slowly pick up afterwards to reach 2.4% by mid-2026.
However, with hotter-than-anticipated inflation in the first quarter of the year, the RBA will likely review its inflation forecasts. Growth figures, on the contrary, will likely suffer minor revisions. Market players will pay more attention to the long-term projections and whether the June 2026 line is moved further away.
How will the RBA interest rate decision impact AUD/USD?
The AUD/USD pair trades above the 0.6600 mark ahead of the announcement, as the US Dollar suffers from a not-that-hawkish Federal Reserve (Fed). The US central bank has made it clear that interest rates will remain high for longer, although policymakers maintain the door open for rate cuts later this year.
Financial markets are optimistic despite global signs of stubbornly high inflation, while stock markets’ strength further underpins AUD/USD.
Valeria Bednarik, FXStreet Chief Analyst, says: “The AUD/USD pair will likely extend its rally, should the RBA deliver a hawkish message. Flipping back to potential rate hikes could be a nice catalyst for those looking to add longs. The pair has met sellers in the 0.6640 price zone in March and in the 0.6660 area in April, meaning large stops should accumulate above the latter. If those get triggered, a rally towards 0.6700 seems likely. The next resistance level is 0.6730, while the final target comes at 0.6770.”
Bednarik adds: “Speculative interest may be quite disappointed if the statement remains the same. AUD/USD could drop towards the 0.6560 price zone, while a break below the latter exposes the 0.6500 mark.”
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
Economic Indicator
RBA Interest Rate Decision
The Reserve Bank of Australia (RBA) announces its interest rate decision at the end of its eight scheduled meetings per year. If the RBA is hawkish about the inflationary outlook of the economy and raises interest rates it is usually bullish for the Australian Dollar (AUD). Likewise, if the RBA has a dovish view on the Australian economy and keeps interest rates unchanged, or cuts them, it is seen as bearish for AUD.