RBA Minutes: Board considered whether to raise rates
The Reserve Bank of Australia (RBA) published the Minutes of its May monetary policy meeting on Tuesday, highlighting that the board members considered whether to raise rates and judged the case for steady policy as the stronger one. Additional details of the RBA Minutes suggest that the board agreed it was difficult to either rule in or rule out future changes in the cash rate, per Reuters.
Key takeaways
“Considered whether to raise rates, judged case for steady policy the stronger one.”
“Board agreed difficult to either rule in or rule out future changes in the cash rate.”
“Flow of data had increased risks of inflation staying above target for longer.”
“Board expressed limited tolerance for inflation returning to target later than 2026.”
“Staff forecasts were considered sound, presented credible path back to target.”
“Board noted forecasts were predicated on a noticeably higher path for the cash rate.”
“Rate rise could be appropriate if forecasts proved overly optimistic.”
“Risks around the forecasts were judged to be balanced.”
“Importantly, inflation expectations remained well anchored.”
“Reasonable to look through short-term variation in inflation to avoid "excessive fine tuning”.”
“Labour market had proved tighter than expected, consumer demand weaker.”
“Financial conditions in Australia were judged to be restrictive.”
“Risks to global growth had become more balanced, the outlook for the US and China revised upward.”
Market reaction
At the time of writing, the AUD/USD pair is trading near 0.6669, holding higher while adding 0.04% on the day.
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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