RBA expected to stand pat as markets speculate over fresh interest-rate hikes later this year
- 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.”
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.
Australian Dollar PRICE Today
The table below shows the percentage change of Australian Dollar (AUD) against listed major currencies today. Australian Dollar was the strongest against the Canadian Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.16% | 0.21% | -0.52% | 0.10% | 0.18% | 0.01% | -0.04% | |
| EUR | -0.16% | 0.14% | -0.55% | 0.00% | 0.24% | -0.07% | -0.10% | |
| GBP | -0.21% | -0.14% | -0.72% | -0.14% | 0.08% | -0.22% | -0.24% | |
| JPY | 0.52% | 0.55% | 0.72% | 0.61% | 0.72% | 0.56% | 0.51% | |
| CAD | -0.10% | -0.00% | 0.14% | -0.61% | -0.02% | -0.07% | -0.07% | |
| AUD | -0.18% | -0.24% | -0.08% | -0.72% | 0.02% | -0.32% | -0.29% | |
| NZD | -0.01% | 0.07% | 0.22% | -0.56% | 0.07% | 0.32% | -0.00% | |
| CHF | 0.04% | 0.10% | 0.24% | -0.51% | 0.07% | 0.29% | 0.00% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Australian Dollar from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent AUD (base)/USD (quote).