Australian Dollar retreats against New Zealand Dollar as RBA leaves rates steady at 4.35%
- The Australian Dollar retreats to near 1.2150 against the New Zealand Dollar after the RBA’s monetary policy announcement.
- The RBA has left its OCR steady at 4.35% after three back-to-back interest rate hikes.
- The Australian central bank has stated that short-term measures of inflation expectations have eased.
The Australian Dollar (AUD) falls back to near 1.2150 from its intraday high of 1.2168 against the New Zealand Dollar (NZD) after the Reserve Bank of Australia’s (RBA) monetary policy announcement. The Australian central bank has announced a pause on its monetary-tightening cycle by leaving the Official Cash Rate (OCR) steady at 4.35%, as expected.
In all three policy announcements so far this year, the RBA raised interest rates by 25 basis points (bps).
The RBA was expected to leave interest rates unchanged as latest Australian inflation data showed that the Consumer Price Index (CPI) has started cooling down and employment conditions appear to be worsening.
In April, Australia’s CPI arrived lower at 4.2% Year-on-Year (YoY), missed 4.4% estimates and the prior reading of 4.6%. The Unemployment Rate jumped to 4.5% from expectations and the previous reading of 4.3%.
In the monetary policy statement, the RBA has stated that short-term measures of inflation expectations have eased, but remain higher than earlier in the year. On external shocks, the RBA said, “Global oil supply issues will take some time to resolve, maintaining upward pressure on global energy prices and inflation.”
In New Zealand (NZ), investors await the Q1 Gross Domestic Product (GDP) data, which will be released on Thursday. The NZ economy is expected to have expanded at a stronger pace of 0.9% against the previous reading of 0.2%.
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.
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