Australian Dollar edges up, RBA hawkish hold does little to revive rate hike expectations
- The Australian Dollar gains slightly after the RBA's hawkish hold.
- The RBA leaves the OCR unchanged at 4.35% for the second time in a row.
- Market experts share a contrary view to the RBA's hawkish monetary policy outlook.
The Australian Dollar (AUD) attracts bids against its major currency peers after the Reserve Bank of Australia’s (RBA) monetary policy decision, but is still trading marginally lower at around 0.7050 against the US Dollar (USD) during the European trading session on Tuesday.
In the policy meeting, the RBA decided to leave the Official Cash Rate (OCR) unchanged at 4.35%, as expected, for the second meeting in a row and kept the door open for a fourth interest rate hike this year, citing risks to inflation remaining tilted to the upside. “Still need to see progress before being confident on CPI,” RBA Governor Michele Bullock said, adding, “We will raise rates again if needed.”
Contrary to RBA Governor Bullock stressing that the next monetary adjustment by the RBA would be on the upside, market experts see the central bank having a weak appetite for further tightening.
RBA holds as forecasts turn less hawkish, leaving Aussie data-dependent
According to TD Securities, the RBA “kept the cash rate on hold at 4.35% as expected in a unanimous decision,” with the accompanying Statement “read less hawkishly than anticipated” and “the revised forecasts imply a less hawkish stance too.” TD notes that “the Statement and the forecasts published today suggest a rate hike is not the Bank's central forecast, implying the bar for a follow-up RBA hike this year has been lifted,” adding that “the RBA's forecasts don't speak to another hike and the Bank does not appear to have the appetite to hike preemptively either.”
Even so, TD highlights that the Press Conference “took on a hawkish tone with the Governor stressing a number of times that another hike is a possibility, a risk to our call for a prolonged RBA hold.” They caution that “clearly the RBA is not out of the woods,” pointing to the Bank's “trimmed mean CPI forecasts for Q3 and Q4 [which] imply 0.8% q/q prints for both quarters.” While “the Statement and the forecasts don't signal alarm,” TD notes that “the Governor was at pains to state where the risks lie for inflation, and they are to the upside.”
Similarly, analysts at Ernst & Young (EY) have also claimed that today's decision "should not be interpreted as an all-clear on inflation as the Reserve Bank has signaled that it remains alert to upside risks and stands ready to respond," Reuters reported. "We continue to see a material risk of further policy tightening later this year if, as we predict, inflation proves more persistent than the Reserve Bank currently expects," EY analysts added.
Strategists at Commerzbank expect an interest rate cut by the RBA instead
Analysts at Commerzbank observed a similar communication that “does not read particularly hawkish,” with the updated projections showing a softer near-term backdrop. They highlight that “the new forecasts revised the expected unemployment rate upward, while short-term inflation forecasts were revised downward,” underscoring a less pressing need for immediate tightening.
Commerzbank points out that “only in the medium term were inflation forecasts revised upward,” a shift that “likely explains the statement that further rate hikes are certainly conceivable and that inflation risks remain on the upside.” Even so, the bank stresses that “all in all, it must be said that the decision and the forecasts seem to be in line with market expectations; the AUD is showing little movement in its initial reaction, at least.”
Looking beyond the initial response, Commerzbank reiterates its broader policy view: “In the medium term, we continue to expect that the RBA’s next move will be an interest rate cut, so the AUD is likely to remain under pressure in the coming months.”
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.