- Australia’s benchmark interest rate is likely to remain at 4.35% for a seventh consecutive meeting in September.
- Reserve Bank of Australia Governor Michele Bullock’s press conference will be in the spotlight.
- The RBA’s policy statement and Bullock’s words are set to inject volatility into the Australian dollar.
The Reserve Bank of Australia (RBA) is likely to continue to buck the trend adopted by major central banks for a dovish turn in policy, opting to hold policy for a seventh consecutive meeting on Tuesday.
The RBA is widely expected to hold the official cash rate (OCR) at 4.35% following its September policy meeting. The decision will be announced at 04:30 GMT, followed by Governor Michele Bullock’s press conference 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 on hold once again after RBA Governor Michele Bullock clearly stated 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 inflationary pressures, particularly in housing, insurance and the rental market, remained high in some parts of the economy, although Australian Treasurer Jim Chalmers expressed concern that interest rates had “wrecked” the economy.
However, Australia’s economy added more jobs than expected in August as the unemployment rate held steady at 4.2%, the Australian Bureau of Statistics (ABS) reported on September 19. The strong Australian employment data indicated the resilience of the labor market, despite a slowing economy, supporting the RBA’s view that a rate cut appears less likely in the near term.
RBA Deputy Governor (Economics) Sarah Hunter said earlier this month that “the labour market remains tight relative to full employment”. She added that the bank “considers current conditions to be ‘above’ full employment, with the unemployment rate needing to rise to ensure the retreat of inflation continues”.
Moreover, the RBA is unlikely to act until the release of critical third-quarter Consumer Price Index (CPI) data on October 30, which could validate the central bank’s progress on inflation.
Previewing the RBA’s policy decision, analysts at TD Securities (TDS) said: “The RBA’s communication and the data stream since the bank’s August meeting do not provide a compelling reason for a change of 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 near the highest level in eight months against the US Dollar (USD) ahead of 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 basis point rate cut at its September meeting last week, taking the federal funds rate into the 4.75%-5.0% range. In contrast, markets expect the RBA to make the first rate cut of 25 basis points to 4.10% only by February 2025, according to the ASX RBA Rate Tracker.
If RBA Governor Bullock sticks to her hawkish rhetoric reiterating that “it is premature to think 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 should Bullock acknowledge the economic slowdown, which could help ease price pressures in the coming months.
With a no-change rate decision already in place, the language in the policy statement and Bullock’s comments during the press conference are likely to grab attention and provide fresh directional impetus to Australian Dollar traders.
Dhwani Mehta, Lead Analyst for the Asian Session at FXStreet, points out the key technicals to trade AUD/USD based on the policy outcome. “AUD/USD is holding near eight-month highs above 0.6800 as the RBA decision looms. The 14-day Relative Strength Index (RSI) is pointing north above the 50 level, currently near 64.50, supporting the upside potential for the Australian Dollar.”
“Buyers need to overcome static resistance around 0.6900 for a sustained uptrend. The next upper barrier is seen at the psychological level of 0.6950 en route towards 0.7000 threshold. On the other hand, any corrective decline could find initial demand at the 21-day simple moving average (SMA) of 0.6747, below which a fresh downtrend towards 0.6670 cannot be ruled out. That level is the confluence of 50-day and 100-day SMAs,” Dhwani added.
Economic indicator
RBA interest rate decision
He Bank of Australia The Bank of Australia announces the interbank interest rate. This rate affects a range of interest rates set by commercial banks, building societies and other institutions for their own borrowers and depositors. It also affects exchange rates. If the Bank of Australia is firm on the inflationary outlook for the economy and raises rates, this is bullish for the Australian dollar, while an outlook for a reduction in inflationary pressures is bearish.
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The RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages Australia’s monetary policy. Decisions are made by a Board of Governors at 11 meetings per year and at ad hoc emergency meetings as necessary. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2%-3%, but also to “…contribute to currency stability, full employment and the economic prosperity and well-being of the Australian people.” Its main tool for achieving this is to raise or lower interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other tools of the RBA are quantitative easing and monetary tightening.
Although inflation has traditionally always been considered a negative factor for currencies, as it reduces the value of money in general, the opposite has actually occurred in modern times with the relaxation of cross-border capital controls. Moderately high inflation now tends to lead central banks to raise their 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 Australia’s case 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, growing economies rather than in weak, shrinking ones. Greater capital inflows boost aggregate demand and the value of the domestic 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 where 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 – 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 carried out after QE, when the economic recovery is underway and inflation is starting 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 it already holds. This 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.
