RBA set to hold interest rate even as other central banks ease policy
- The Reserve Bank of Australia is expected to hold the interest rate at 4.35% in December.
- Australian central bank Governor Michele Bullock’s comments will be closely scrutinized to gauge when could the RBA trim its benchmark rate.
- The volatility around the Australian Dollar is set to ramp up on the RBA policy announcements.
The Reserve Bank of Australia (RBA) is unlikely to alter its stance on the monetary policy for the ninth meeting in a row on Tuesday.
The RBA is expected to hold the Official Cash Rate (OCR) steady at 4.35% following its final policy meeting this year. The decision will be announced at 03:30 GMT and Governor Michele Bullock’s press conference will follow at 04:30 GMT.
Focus on RBA Governor Bullock’s outlook on interest rate
The RBA remains an outlier among many other central banks from developed markets that already embarked on the easing trajectory. Elevated core and services inflation and relatively tight labor market conditions in Australia are the primary reasons behind the bank’s cautious stance.
The Australian Unemployment Rate remained at 4.1% in October for the third consecutive month. The economy added 9,700 full-time jobs and 6,200 part-time roles, making a net change of 15,900 positions. The RBA’s closely-watched inflation gauge, the annual Trimmed Mean Consumer Price Index (CPI), slowed to 3.5% from 4.0% in the third quarter but stayed well above the Bank’s 2%-3% target.
RBA Governor Michele Bullock said late last month that “given the tightness in Australia’s labor market, along with our assessment that the level of demand still exceeds supply in the broader economy, we expect it will take a little longer for inflation to settle at target.”
She further noted that Australia’s core inflation is “too high” to consider interest rate cuts in the near term.
However, Australia’s economy in the third quarter grew at the slowest annual pace since the pandemic. The OZ nation’s Gross Domestic Product (GDP) rose 0.3% in the September quarter, missing market forecasts of 0.4%. The surprisingly weak growth numbers undermined the RBA’s forecast for a 1.5% growth by the end of the year.
Weaker-than-expected GDP growth made markets almost fully price in a rate cut next April at 96% (from 73% before) and saw 35 basis points (bps) easing for May (from 28 bps before), according to Refinitive interest rate probabilities data.
Therefore, the policy statement and Governor Bullock’s comments will be key to determining the RBA’s outlook on rates heading into the new year.
Previewing the RBA policy decision, TD Securities (TDS) analysts said: “Q3 GDP underwhelmed, but it’s unlikely to influence the RBA’s monetary policy outlook. Unless there are sharp job losses and the unemployment rate rises to 4.5% in short order, the absolute earliest the Bank could cut is in May. We are calling August.”
How will the Reserve Bank of Australia decision impact AUD/USD?
RBA Governor Michele Bullock is widely expected to repeat that “the Board is not ruling anything in or out” and “think there are still risks on the upside for inflation.” The Bank’s wait-and-see approach will likely provide the much-needed respite to the Australian Dollar (AUD), lifting the AUD/USD pair from four-month troughs below 0.6400.
If Bullock expresses concerns about the slowing economy while noting that the Board discussed rate cuts as an option at the meeting, the Aussie is expected to face intense selling pressure, revisiting levels last unseen since October 2023.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, notes key technicals for trading AUD/USD on the policy announcements.
“After charting a 50-day Simple Moving Average (SMA) and 200-day SMA Death Cross on December 4, AUD/USD remains exposed to downside risks in the run-up to the RBA showdown. The 14-day Relative Strength Index (RSI) remains way below the 50 level, currently near 40, adding credence to bearish potential.”
“A dovish surprise from the Bank could fuel a fresh AUD/USD decline toward the August 5 low of 0.6348, below which the 0.6300 level will come into play. The next downside target aligns at the October 2023 low of 0.6270. Alternatively, buyers need acceptance above the 21-day SMA at 0.6484 to initiate a meaningful recovery. Further up, the November 25 high of 0.6550 will be tested before encountering major daily SMAs near the 0.6620 region,” Dhwani adds.
Economic Indicator
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.