The Reserve Bank of Australia Raised Rates Again & Pointed to More Hikes, while Staying Flexible
RBA Hiked Rates Again
The Reserve Bank of Australia (RBA) raised interested rates today by another 50 basis points [1], marking the fourth straight hike of this size. This was the fifth consecutive in a tightening cycle that started back in May and has brought the Official Cash Rate (OCR) to 2.35% and the highest level since 2015.
Policy makers reiterated their commitment to "doing what is necessary to ensure that inflation in Australia returns to target over time" and judged that today's action will help towards this goal and "create a more sustainable balance of demand and supply in the Australian economy".
The headline Consumer Price Index had jumped to 6.1% in the second quarter (year-over-year) and the central bank expects it to be around 7.75% over the current year, based on the recent upgraded forecasts.
The labor market is "very tight and many firms are having difficulty hiring workers", as Unemployment dropped further to 3.4% in July and the lowest levels since 1974.
More Tightening Ahead
High prices is the main driver behind the RBA's aggressive tightening cycle, with the strong labor market supporting this policy path. However, monetary tightening could harm the economy and the Board has acknowledged that the path to achieving a balance between lowering inflation and avoiding and economic downturn, is "a narrow one and clouded in uncertainty".
Officials expressed their expectation to "increase interest rates further over the months ahead", strengthening their wording, but they also repeated that policy is "not on a pre-set path".
This last reference had been added last month and was kept in today's statement, as the central bank wants to maintain its flexibility. Forward guidance remains somewhat unclear, as policy makers can't back off from their commitment to bring inflation down, but at the same time are worried of the adverse effects on economic activity.
AUD/USD Reaction
The pair faced pressure after the rate hike, since the Australian central maintained its optionality and flexibility around the future rate path, despite pointing toward to more hikes.
AUD/USD erased earlier gains and remain soft during the start of the European session. So far it managed to avoid fresh monthly lows though, as the greenback shows signs of exhaustion.
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 03 Dec 2023 https://www.rba.gov.au/media-releases/2022/mr-22-28.html |
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