The Reserve Bank of Australia Hiked Rates to the Highest in 12 Years but Made a Dovish Shift
RBA Rate Hike
The Reserve Bank of Australia raised rates by 0.25% today, to 4.35% and the highest level in twelve years [1]. This was the first hike since the start of summer and after four consecutive holds. It has now increased rates by 425 basis points in this tightening cycle, which started in May 2022.
The writing was on the wall, as the minutes of the previous meeting had shown readiness to act, governor Bullock had warned of slow progress on inflation and the International Monetary Fund had recommended "further monetary policy tightening" just a few days ago. [2]
Consumer price pressures have eased substantially to 5.4% y/y in the third quarter, but remain far from RBA's 2-3% goal and the monthly CPI has shown increase over the last two releases. Although it "has passed its peak", inflation is "still too high" and policymakers now believe that it is "proving more persistent than expected a few months ago". As such, they judged that today's hike was "warranted to be more assured that inflation would return to target in a reasonable timeframe".
Moreover, officials raised their forecasts, now expecting inflation to 3.5% by the end of the next year and "at the top" of the 2-3% range by the end of 2025, compared to 3.25% and 2.75% respectively in the previous projection. The labor market meanwhile remains "tight", despite progress and officials now expect it to peak at around 4.25%, lower than the 4.5% of the previous projection.
Despite increasing the interest rate and upgrading their inflation forecasts, policymakers actually softened the rhetoric around future moves. They now said that "whether further tightening of monetary policy is required" to return inflation to target will depend on the incoming data, compared to the stronger "some further tightening of monetary policy may be required" reference of the previous statement.
AUD/USD comes from its best week of the year, due to the Fed's dovish shift and anticipation of an increase by the RBA. Even though the Australian central bank delivered, this was a dovish hike, which sends the pair lower. Given the inflation outlook, policymakers may need tighten further, but the fact that Ms Bullock hiked in just her second meeting as governor will likely give her hawkish credibility and greater flexibility.
Nikos Tzabouras
Senior Financial Editorial Writer
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
References
| Retrieved 07 Nov 2023 https://www.rba.gov.au/media-releases/2023/mr-23-30.html | |
| Retrieved 03 May 2024 https://www.imf.org/en/News/Articles/2023/10/31/cs103123-australia-staff-concluding-statement-of-the-2023-article-iv |
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