The Reserve Bank of Australia (RBA) published the Minutes of its December monetary policy meeting on Tuesday, highlighting that the Board members decided the case for steady rates was the stronger one at this meeting. Additional details of the RBA Minutes suggest that the central bank saw encouraging signs of progress on inflation, this needed to continue.
Key takeaways
“Board considered whether to raise rates by 25bp or hold steady.”
“The decided case for steady rates was the stronger one at this meeting.”
“Board saw “encouraging signs” of progress on inflation, this needed to continue.”
“Whether further tightening required would be decided by data, assessment of risks.”
“Recent data had not warranted a material change to the economic outlook.”
“Board saw value in waiting for more data to assess the balance of risks.”
“Risk inflation could stay high too long balanced by the risk of a sharper slowdown in demand.”
“Consumption growth quite weak, many households facing a painful squeeze on finances.”
“But domestic demand still running ahead of supply, inflation above several other countries.”
“Board noted RBA staff forecast had inflation returning to the top of the band by end 2025 rather than midpoint.”
Market reaction
At the time of writing, the AUD/USD pair is trading near 0.6707, holding higher while adding 0.06% on the day.
About RBA Minutes
The minutes of the Reserve Bank of Australia meetings are published two weeks after the interest rate decision. The minutes give a full account of the policy discussion, including differences of view. They also record the votes of the individual members of the Committee. Generally speaking, if the RBA is hawkish about the inflationary outlook for the economy, then the markets see a higher possibility of a rate increase, and that is positive for the AUD.
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-minutes-see-encouraging-signs-of-progress-on-inflation-202312190042