The Reserve Bank of Australia Delivered its Biggest Rate Hike in More than 20 Years

  • AUDUSD
    (${instrument.percentChange}%)

Hawkish Shift

The Reserve Bank of Australia (RBA) had for a long time been behind most of its major peers, in normalizing the ultra-loose monetary policies which were implemented in the wake of the COVID-19 pandemic to combat the economic fallout.

During this year however, the central has been turning hawkish and things have been moving fast over the last couple of months. In early May, it delivered its first interest rate hike in more than 10 years (by 25 basis points), ignoring the then upcoming Australian general elections, which some believed could have prevented it from action.

Today, the RBA doubled down on hawkish pivot and raised rates by 50 basis points (to 0.85%), which was more than the baseline expectation and the largest upwards move since February 2000.

Furthermore, the Board expects to take "further steps in the process of normalising monetary conditions in Australia over the months ahead" and reiterated its commitment to do "what is necessary to ensure that inflation in Australia returns to target over time". [1]

Trade the News: View our Economic Calendar

High Inflation & Resilient Economy

Similar to other countries - although to a lesser extent - Australia is troubled by high inflation, due to the pandemic and the war in Ukraine, which has sparked this shift towards monetary tightening.

Headline Consumer Price Index (CPI) had surged 5.1% in the first quarter (year-over-year), with the central bank expecting it to rise up to 6% in the second half [2]. In today's statement, it noted that inflation "has increased significantly".

Despite the outside shocks, the Australian economy seems to be in good shape, as we have commented before, with the RBA saying today that it is "resilient". Last week's data showed that GDP slowed in the first quarter, having grown by 3.3% year-over-year from 4.4% (revised), but this is still a solid performance.

More to it, Australian Unemployment was at 3.9% in April, which is the lowest level in nearly 50 years, while the May report is expected next week.

The combination of high inflation and a resilient economy is supportive of the central bank's aggressive tightening, although there are uncertainties.

RBA vs US Fed

The US Federal Reserve has also delivered 75 basis points worth of interest rate hikes this year and has pointed to half percentage point moves over the next two meetings. After the last decision in May, it seemed to be turning a bit conservative, which made sense given the GDP contraction in Q1 and the fact that inflation has been showing signs of easing.

Last week however, we saw an effort by various officials to reassert the bank's hawkishness and resolve to bring inflation down. Vice-Chair Ms Brainard for instance, said that "Right now, it's very hard to see the case for a pause," and added that "We've still got a lot of work to do to get inflation down to our 2% target" in a CNBC interview. [3]

The policy differential between the two central banks has now diminished greatly, but we may get a better sense of the Fed's intentions past July, in next week's decision, which will also include the updated staff projections.

AUD/USD Reaction

The pair spiked after the aggressive 50 bps hike by the RBA, but broader sentiment works against it and it trades in the red. Its three week advance was contained by the 200Days EMA on Friday, whereas the new one has started on the back foot.

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 07 Jun 2022 https://www.rba.gov.au/media-releases/2022/mr-22-14.html

2

Retrieved 07 Jun 2022 https://www.rba.gov.au/publications/smp/2022/may/economic-outlook.html

3

Retrieved 27 Jun 2022 https://www.cnbc.com/2022/06/02/fed-vice-chair-lael-brainard-says-its-hard-to-see-the-case-for-the-fed-pausing-rate-hikes-.html

Disclosure

Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided on an "as-is" basis, as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. Although this commentary is not produced by an independent source, FXCM takes all sufficient steps to eliminate or prevent any conflicts of interests arising out of the production and dissemination of this communication. The employees of FXCM commit to acting in the clients' best interests and represent their views without misleading, deceiving, or otherwise impairing the clients' ability to make informed investment decisions. For more information about the FXCM's internal organizational and administrative arrangements for the prevention of conflicts, please refer to the Firms' Managing Conflicts Policy. Please ensure that you read and understand our Full Disclaimer and Liability provision concerning the foregoing Information, which can be accessed here.

Past Performance: Past Performance is not an indicator of future results.

Spreads Widget: When static spreads are displayed, the figures reflect a time-stamped snapshot as of when the market closes. Spreads are variable and are subject to delay. Single Share prices are subject to a 15 minute delay. The spread figures are for informational purposes only. FXCM is not liable for errors, omissions or delays, or for actions relying on this information.

Risk Warning: Our service includes products that are traded on margin and carry a risk of losses in excess of your deposited funds. The products may not be suitable for all investors. Please ensure that you fully understand the risks involved.

${getInstrumentData.name} / ${getInstrumentData.ticker} /

Exchange: ${getInstrumentData.exchange}

${getInstrumentData.bid} ${getInstrumentData.divCcy} ${getInstrumentData.priceChange} (${getInstrumentData.percentChange}%) ${getInstrumentData.priceChange} (${getInstrumentData.percentChange}%)

${getInstrumentData.oneYearLow} 52/wk Range ${getInstrumentData.oneYearHigh}