The Reserve Bank of Australia Surprised with its Rate Hike, Kept Door Open to More Moves
Surprise Rate Increase
The Reserve bank of Australia had paused its rate increase cycle last month, in order to "assess the impact of the increase in interest rates to date and the economic outlook" [1]. Even though it had kept the door open to more tightening, baseline expectations were for no change in today's meeting.
However, policymakers stunned markets with a 25 basis points hike, which brought the Official Cash Rate (OCR) to 3.85% and the highest level in eleven years [2]. The central bank has delivered 375 worth of hikes, since the May 2022 lift-off.
Too High Inflation
Last week's data showed that the Consumer Price Index (CPI) eased to 7% y/y in the first quarter of the year, the smallest growth in nearly a year. Although the RBA spoke today of a "welcome decline" and stated that inflation "has passed its peak" in Australia, it still views the latest reading as "still too high".
Furthermore, officials believe that inflation will require some time before moving back down to the 2-3% target. Although it lowered its forecast to 4.5% by the end of the year (from 4.75% previously [3]), it now expects CPI to hit the top range in mid-2025, from end of 2024 in the February projections.
Tight Labor Market
The Unemployment Rate ticked down in March, to 3.5% and closer to its 50-year low, supporting the central bank's talk of a "very tight" labor market. Policymakers believe unemployment will rise, but gradually, to around 4.5% in mid-2025.
Below Trend Growth
The Australian economy has been very resilient, but GDP expanded by just 2.7% y/y in the fourth quarter of 2022, marking the smallest growth in nearly two years. The Reserve bank of Australia lowered its 2023 forecast today, expecting GDP of 1.25% (from 1.5% previously), speaking of "below trend" growth pace and a "narrow path" to a soft landing".
More Hikes on the Table
High inflation and tight labor market, maintain pressure on policymakers for further action and they kept more rate hikes on the table. The Board said that "some further tightening" in monetary policy "may be required", to make sure that inflation falls back to the 2-3% target in a "reasonable timeframe".
On the other hand, inflation is cooling and the economy slowed down significantly in the fourth quarter. As such, the central bank may not have much more tightening road ahead, but the path is data-dependent.
AUD/USD Reaction
After last month's pause and given last week's moderation in inflation, markets had come to expect that the RBA would stay on the sidelines again today. This did not turn out to be the case though and the surprise hike sent AUD/USD soaring higher.
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
| Retrieved 02 May 2023 https://www.rba.gov.au/media-releases/2023/mr-23-08.html | |
| Retrieved 02 May 2023 https://www.rba.gov.au/media-releases/2023/mr-23-10.html | |
| Retrieved 21 Sep 2023 https://www.rba.gov.au/publications/smp/2023/feb/pdf/statement-on-monetary-policy-2023-02.pdf |
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