Australian Dollar: Dovish hike weighs on aussie – Commerzbank

Norman Liebke at Commerzbank notes that the Reserve Bank of Australia (RBA) raised rates to 4.85%, but the Australian Dollar fell as markets saw the move as dovish. With growth and labour forecasts softening and inflation driven partly by external Oil shocks, he expects no further hikes and sees the Aussie’s path tied to US and Euro interest rate expectations.

RBA caution and external inflation drivers

"The Australian central bank raised its policy rate by 25 basis points to 4.85% this morning. However, as the move had been widely expected by both the market and the consensus in the Bloomberg survey, the Australian dollar was unable to benefit: AUD/USD fell by around 0.3% in the immediate aftermath."

"In its statement, the RBA highlights that inflation remains well above its 2-3% target range and is unlikely to return to that range until late 2027, around three quarters later than previously expected. This could also be problematic for inflation expectations, as survey-based measures, at least, have risen more sharply of late, both at the short and long end. At first glance, this sounds fairly hawkish. Yet the Australian dollar weakened, and even after today’s rate hike, financial markets are not pricing in any further increase. So why is that?"

"The RBA stresses that the economy has weakened, as reflected, among other things, in falling house prices. With interest rates now higher, weaker residential investment and softer private consumption are expected next year, which should gradually help bring inflation down. The growth outlook has also deteriorated: for the end of 2027, the RBA now expects growth of just 1.3%, compared with 1.6% in its previous forecast."

"The fact that today’s rate hike was approved by only six votes to three further underlines the growing caution within the Board. Overall, the hurdle for another rate hike is therefore likely to be quite high, and we do not expect any further increase in interest rates. In the near term, the Aussie could remain under pressure following the relatively dovish rate hike."

"Further ahead, however, its performance is likely to depend primarily on how interest rate expectations in the US and the euro area evolve. Although our economists expect rate hikes in December, current market expectations for further monetary tightening are likely overdone, which could ultimately benefit the Aussie."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)