Australia Interest Rate Decision Preview: RBA set for third consecutive hold despite falling inflation
- Interest rate in Australia is seen on hold at 4.35% for the third consecutive meeting in March.
- Reserve Bank of Australia Governor Michele Bullock will hold a press conference at 04:30 GMT.
- The language in the RBA’s statement and Bullock’s presser hold the key for the Australian Dollar.
The Reserve Bank of Australia (RBA) is widely expected to hold the Official Cash Rate (OCR) steady at a 12-year high of 4.35% following the conclusion of its March monetary policy meeting on Tuesday. The decision will be announced at 03:30 GMT.
With a rates on-hold decision fully baked in, the Australian Dollar’s fate hinges on the tone or language in the policy statement, as well as on Governor Michele Bullock’s comments during the post-policy press conference. The presser will be held at 04:30 GMT.
Reserve Bank of Australia expected to extend the pause, but what’s next?
The RBA is set to extend the pause into the third meeting in a row when it meets on Tuesday. Markets, however, will be focused on fresh signals offered by the central bank on the timing and the scope of a policy pivot.
Economists are divided, with some forecasting an RBA interest rate cut not until November while some expect the Bank to begin lowering rates in September. Amidst the uncertainty around the timing of the rate cut, RBA Governor Michele Bullock’s outlook on inflation and the policy rate will hold the key, as she would take account of slowing economic growth and price pressures.
Data from the Australian Bureau of Statistics (ABS) showed the Consumer Price Index (CPI) rose 0.6% in the fourth quarter (Q4) of last year, under market forecasts for a 0.8% increase. A closely watched measure of core inflation, the trimmed mean, rose 0.8% in the same period, below expectations of a 0.9% increase.
The latest monthly inflation data for January showed that the CPI rose at an annual rate of 3.4%, at the same pace as seen in December while a tad lower than the estimate of 3.5%. Meanwhile, Australia’s annual growth slowed to 1.5% in Q4 from 2.1% the previous quarter, registering its lowest since early 2021.
But, the services inflation, measured by the Wage Price Index, increased 4.2% YoY in Q4, up from a revised 4.1% gain in the third quarter and above the market estimate of 4.1%. The reading was the highest since Q1 2009, with pay growth in both the public and private sectors.
Even though wage inflation remains at elevated levels, Governor Bullock remains confident that it will come down. Testifying before the Australian Parliament last month, Bullock said that “inflation is being persistent, particularly in services. But it is coming down.”
Does this indicate a potential dovish shift in the central bank’s language in the upcoming meeting?
Previewing the RBA policy decision, analysts at TD Securities (TDS) explained, “it should be a fairly straightforward on-hold decision, though the focus will be if the RBA retains its soft hawkish bias. The jobs market has shown cracks after the dismal Dec-Jan prints while monthly CPI reaffirms the disinflation narrative, with the near-term inflation impulse towards the downside. We will keep an eye out on QT plans as the RBA has kept strangely quiet about it.”
How will the RBA interest rate decision impact AUD/USD?
The Australian Dollar (AUD) has entered corrective mode after reaching fresh two-month highs at 0.6667 against the US Dollar last week. The AUD/USD pair could see an extended pullback if Governor Bullock delivers a dovish message, acknowledging the economic slowdown and the gradual decline in inflation. On the other hand, AUD/USD could revert toward multi-month highs should the RBA policymakers retain their hawkish stance.
In its February policy statement, the RBA said that Further increase in interest rates can't be ruled out, adding that the board needs to be confident that inflation is moving sustainably towards the target range.”
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, notes key technicals to trade AUD/USD on the policy outcome. “AUD/USD is challenging a powerful confluence support area near 0.6560 in the lead-up to the RBA showdown. That zone is the intersection of the 21-, 50- and 200-day Simple Moving Averages (SMA). The 14-day Relative Strength Index (RSI) is battling the 50 level, suggesting that the pair lacks a clear directional bias ahead of the RBA interest rate decision.”
Dhwani adds: “Aussie buyers need to defend the abovementioned key support near 0.6560 on a daily closing basis to attempt a rebound toward the previous week’s high of 0.6638. The next upside barrier is seen at the 0.6700 round figure. Conversely, a downside break of the 0.6560 support could trigger a fresh downtrend toward the 0.6500 level. The last line of defense for buyers is seen at 0.6479, the March 5 low.”
Economic Indicator
Australia RBA Interest Rate Decision
The Reserve Bank of Australia (RBA) announces its interest rate decision at the end of its eight scheduled meetings per year. If the RBA is hawkish about the inflationary outlook of the economy and raises interest rates it is usually bullish for the Australian Dollar (AUD). Likewise, if the RBA has a dovish view on the Australian economy and keeps interest rates unchanged, or cuts them, it is seen as bearish for AUD.
Read more.Next release: 03/19/2024 03:30:00 GMT
Frequency: Irregular
Source: Reserve Bank of Australia
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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