The Reserve Bank of Australia (RBA) published the minutes of its May monetary policy meeting on Tuesday, highlighting that Council members considered raising rates and judged the case for a stable policy to be the strongest. Additional details from the RBA minutes suggest the board agreed it was difficult to even rule out future changes to the spot rate, according to Reuters.
Main conclusions
“The possibility of raising rates was considered, it was judged that keeping monetary policy unchanged was appropriate“.
“The Council agreed that it is difficult to accept or rule out future changes in the reference interest rate.”
“The flow of data has increased the risk that inflation will remain above target for longer.”
“Limited tolerance was expressed for inflation to return to target after 2026.”
“Staff forecasts were considered solid, presenting a credible path back to goal.”
“The Board noted that the forecasts were based on a significantly higher path for the spot rate.”
“A rate hike might be appropriate if forecasts prove too optimistic.”
“Risks around the forecast were considered balanced.”
“It is important to highlight that inflation expectations remained well anchored.”
“It is reasonable to look at the short-term variation in inflation to avoid 'excessive fine tuning.'”
“The labor market had been more tense than expected, consumer demand weaker.”
“Financial conditions in Australia were considered restrictive.”
“Risks to global growth had become more balanced, outlook for the US and China revised upwards.”
The RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages Australia's monetary policy. Decisions are made by a Council of Governors in 11 meetings a year and in any ad hoc emergency meetings that are necessary. The RBA's main mandate is to maintain price stability, which means an inflation rate of 2%-3%, but also “…contribute to currency stability, full employment and economic prosperity and well-being of the Australian people. Its main tool to achieve this is to raise or lower interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening monetary policy.
Although inflation has traditionally always been considered a negative factor for currencies, since it reduces the value of money in general, the truth is that in modern times the opposite has happened with the relaxation of cross-border capital controls. Moderately high inflation now tends to lead central banks to raise interest rates, which in turn has the effect of attracting more capital inflows from global investors looking for a lucrative place to store their money. This increases the demand for the local currency, which in the case of Australia is the Australian Dollar.
Macroeconomic data gauges the health of an economy and can impact the value of its currency. Investors prefer to invest their capital in safe and growing economies than in precarious and contracting economies. A greater influx of capital increases aggregate demand and the value of the national currency. Classic indicators such as GDP, manufacturing and services PMIs, employment and consumer sentiment surveys can influence the AUD. A strong economy may encourage the Reserve Bank of Australia to raise interest rates, also supporting the AUD.
Quantitative Easing (QE) is a tool used in extreme situations in which 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) in order to purchase assets – typically government or corporate bonds – from financial institutions, providing them with much-needed liquidity. . QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is carried out after QE, when the economic recovery is underway and inflation begins to rise. While in QE the Reserve Bank of Australia (RBA) buys government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets and stops reinvesting the maturing principal of the bonds. bonds you already own. It would be positive (or bullish) for the Australian Dollar.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
