- The benchmark interest rate in Australia is likely to remain at 4.35% for the seventh straight meeting in September.
- The Reserve Bank of Australia Governor Michele Bullock’s press conference will hog the limelight.
- The RBA’s policy statement and Bullock’s words are set to inject volatility around the Australian Dollar.
The Reserve Bank of Australia (RBA) is likely to continue bucking the trend adopted by major central banks of the dovish policy pivot, opting to maintain the policy for the seventh consecutive meeting on Tuesday.
The RBA is widely expected to hold the Official Cash Rate (OCR) at 4.35% following its September monetary policy meeting. The decision will be announced at 04:30 GMT, with Governor Michele Bullock’s press conference to follow at 05:30 GMT.
No Reserve Bank of Australia rate cuts expected this year
Economists and industry experts unanimously expect the central bank to hold the policy rate yet again after RBA Governor Michele Bullock clearly said in her speech at the Anika Foundation earlier this month that “the board does not expect to be in a position to cut rates in the near term.”.
Bullock argued that inflation pressures, particularly in home construction, insurance and the rental market, continued to be high in some parts of the economy even though Australian Treasurer Jim Chalmers voiced concerns that interest rates have “smashed” the economy.
Australia’s economy, however, added more jobs than expected in August as the Unemployment Rate remained steady at 4.2%, the Australian Bureau of Statistics (ABS) reported on September 19. Strong Australian employment data indicated the labor market resilience, in the face of a slowing economy, supporting the RBA’s view that an interest-rate cut appears less likely in the short term.
RBA Assistant Governor (Economic) Sarah Hunter said earlier this month that “the labor market is still tight relative to full employment.” She added that the bank “viewed current conditions to be ‘above’ full employment with jobless rate needing to rise to ensure inflation’s retreat continued.”
Further, the RBA is unlikely to act until the release of the critical Consumer Price Index (CPI) data for Q3, due on October 30, which could validate the central bank’s progress on inflation.
Previewing the RBA policy decision, analysts at TD Securities (TDS) said: “RBA communication and the run of data since the Bank’s August meeting provides no compelling reason for a shift in stance at this week’s meeting, ruling out a rate cut this year.”
How will the RBA interest rate decision impact AUD/USD?
The Australian Dollar (AUD) is trading close to the highest level in eight months against the US Dollar (USD) heading into the RBA event risk. The ongoing uptrend in the AUD/USD pair could be mainly attributed to the divergent monetary policy outlooks between the US Federal Reserve (Fed), which has just started its easing cycle, and the RBA.
The Fed announced a 50 bps rate reduction at its September meeting last week, bringing the fed funds rate to the range of 4.75%-5.0%. In contrast, markets expect the RBA to go for the first 25 bps rate cut to 4.10% only by February 2025, according to the ASX RBA Rate Tracker.
If RBA Governor Bullock sticks to her hawkish rhetoric by reiterating that “it is premature to be thinking about rate cuts,” AUD/USD could extend the ongoing uptrend to test the 0.6900 threshold.
Alternatively, the pair could come under intense selling pressure and target the 0.6700 level in case Bullock acknowledged the economic slowdown, which could contribute to easing price pressures in the coming months.
With a no-rate change decision already a given, the language in the policy statement and Bullock’s remarks during the press conference are likely to grab the eyeballs and offer a fresh directional impetus to the Aussie traders.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, notes key technicals to trade AUD/USD on the policy outcome. “AUD/USD hangs close to eight-month highs above 0.6800 as the RBA decision looms. The 14-day Relative Strength Index (RSI) points north above the 50 level, currently near 64.50, backing the Aussie’s bullish potential.”
“Buyers need to scale the static resistance at around 0.6900 for a sustained uptrend. The next topside barrier is seen at the 0.6950 psychological level en route to the 0.7000 threshold. On the flip side, any corrective decline could meet the initial demand area at the 21-day Simple Moving Average (SMA) of 0.6747, below which a fresh downtrend toward 0.6670 cannot be ruled out. That level is the confluence of the 50-day and 100-day SMAs,” Dhwani adds.
Economic Indicator
RBA Interest Rate Decision
The Reserve Bank of Australia (RBA) announces its interest rate decision at the end of its eight scheduled meetings per year. If the RBA is hawkish about the inflationary outlook of the economy and raises interest rates it is usually bullish for the Australian Dollar (AUD). Likewise, if the RBA has a dovish view on the Australian economy and keeps interest rates unchanged, or cuts them, it is seen as bearish for AUD.
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RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
Source: https://www.fxstreet.com/news/rba-widely-expected-to-keep-key-interest-rate-unchanged-amid-persisting-price-pressures-202409232245