The Reserve Bank of Australia Raised Rates by 0.5% Again, But Moderated its Guidance, in another Hint of Potentially Less Aggressive Central Banks Ahead

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RBA's Outsized Hike Due to High Inflation

The Reserve bank of Australia delivered today its third consecutive 50 basis points rate hike [1] and the fourth increase in a row, making it the longest tightening streak since at least 1990. Interest rates now stand at 1.85%, which is the highest level in six years.

Officials noted that the recent increases in rates were "required in order in order to bring Inflation back to target", since it has been running high for a while now, albeit not as much as in other developed economies.

Last week's data, revealed that Australia's headline CPI surged 6.1% in the second quarter (year-over-year), from 5.1% prior. This marked the largest increase in two-decades and the series, while exceeding the central bank's projection that inflation would peak at 6%.

The RBA raised its forecasts significantly today, now expecting inflation to be at around 7.75% over the current year, before dropping to a little over 4% in 2023.

Strong Economy, But for How Long?

We believe that the Reserve Bank of Australia has had an easier time delivering its aggressive and front-loaded tightening cycle, compared to other major central banks, due the strength of the economy.

This is highlighted by the labor market, which "remains tighter than it has been for many years", as Unemployment dropped to 3.5% in June, from 3.9% previously. This is an impressive print, since it constituted new nearly fifty-year lows.

Furthermore, the economy expanded by a healthy annualized 3.3% in Q1 and the RBA expects to continue to grow strongly this year. However, it warned that the pace of growth will then slow and lowered its GDP projections to 3.25% over 2022 and 1.75% in each of the following two years.

The central bank seemed to us a bit less bullish on the economy this time around, as the effects of monetary tightening and other factors, apparently begin to take their toll.

Moderated Guidance, Echoing the US Fed

Policy makers reiterated the view that further steps in normalizing policy are needed over the upcoming months, but this time around they added that this "is not on a pre-set path"
Officials did say that they place "a high priority" on the return of inflation to the 2%–3% range, but noted that they want to keep the economy "on an even keel", acknowledging that the path to achieving this balance "is a narrow one and clouded in uncertainty".

Albeit subtle, these references may hint to a potentially less aggressive stance ahead and a bigger focus on the effects of the monetary tightening to the economy. This makes sense as interest rates - not only from the RBA - have risen meteorically to around neutral levels and closer to the targets of the respective central banks, while fears of economic slowdown have intensified.

Today's RBA rhetoric echoed the Fed, which delivered another bold 0.75% rate hike last week, but refrained from providing specific forwards guidance and Chair Powell tried to prepare markets for moderate moves ahead, saying that it *"likely will become appropriate to slow the pace of increases"*. [2]

It will now be interesting to see if other central bank's will begin tweaking their language towards the same direction, although as long as inflation remains sky-high, a significant divergence from the aggressive tightening path may prove hard.

AUD/USD Reaction

The pair has been recovering over the last couple of weeks from its two-year-lows as expectations around the Fed eased and the US Dollar faced difficulties as a result.

Despite another outsized rate hike today, the RBA made a dovish change to its rhetoric that hints to a slower pace of increases ahead, following the Fed. This sends AUD/USD lower, since it loses more than 1% at the time of writing.

Nikos Tzabouras

Senior Market Specialist

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

1

Retrieved 02 Aug 2022 https://www.rba.gov.au/media-releases/2022/mr-22-21.html

2

Retrieved 01 Dec 2022 https://www.federalreserve.gov/monetarypolicy/fomcpresconf20220727.htm

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