RBA’s Bullock: Measured, gradual approach to monetary policy easing is appropriate
Reserve Bank of Australia (RBA) Governor Michele Bullock is speaking at the Anika Foundation in Sydney on Thursday, with audience questions expected.
Key quotes
Measured, gradual approach to monetary policy easing is appropriate.
Labor market has eased only gradually, unemployment rate relatively low.
Rise in unemployment in June was in line with our forecasts, not a “shock”.
June data suggests labor market moved a little further towards balance.
Leading indicators not pointing to further significant near-term rise in unemployment.
Other labour market measures, such as vacancy rate, have been stable.
Labour market rebalancing through vacancies, hours worked, voluntary job switching.
RBA not targeting a specific unemployment rate or job losses.
Q2 core inflation may not have slowed as much as first expected.
Need data to support forecast of core inflation slowing toward 2.5%.
Want to make sure that inflation remains low and stable from here on in.
Still uncertainty and unpredictability in global economy.
Likelihood of a severe downside ‘trade war’ appears to have diminished.
Market reaction
AUD/USD flirts with eight-month highs near 0.6620 following Governor Bullock’s cautious remarks, adding 0.26% on the day as of writing.
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.