RBA expected to keep interest rate on hold amid sticky inflation and tight labor market conditions
- Australia’s benchmark interest rate is set to stay unchanged at 4.35% in November.
- The focus remains on Reserve Bank of Australia Governor Michele Bullock’s comments and updated economic forecasts.
- The Australian Dollar could wilt if RBA Governor Bullock ramps up bets for a December rate cut.
The Reserve Bank of Australia (RBA) is expected to sit tight yet again on its monetary policy, extending the pause into the eighth straight meeting on Tuesday.
The RBA is set to maintain the Official Cash Rate (OCR) at 4.35% after its November policy meeting. The decision will be announced at 03:30 GMT, followed by Governor Michele Bullock’s press conference at 04:30 GMT.
Reserve Bank of Australia to stand pat again
With a no-rate change decision fully priced in this month, the market’s attention will be on the RBA’s updated economic forecasts and Governor Michele Bullock’s press conference for fresh hints on the timings of the central bank’s first interest rate cut since its post-covid tightening cycle.
Sticky underlying inflation and tight labor market conditions continue to back the case for a cautious stance by the Australian central bank.
The RBA’s preferred inflation gauge, the annual Trimmed Mean Consumer Price Index (CPI), slowed to 3.5% from 4.0% in the third quarter but stayed above the Bank’s 2%-3% target. The service-sector inflation also remained elevated.
Additionally, the RBA’s annual report, published on October 25, reiterated that inflation would not be sustainable within the 2%-3% target for ‘another year or two’.
Meanwhile, the Australian economy added 64,100 jobs in September, beating the estimated net gain of 25,000 jobs. Of the new jobs created in September, 51,600 were full-time roles. The Unemployment Rate stood unchanged at 4.1% in September, against the forecast of an increase to 4.2%.
These data points potentially rule out any policy change this week and for the rest of this year. Markets are currently pricing in less than 20% probability of a Christmas rate cut by 25 bps, according to BBH analysts.
Previewing the RBA policy decision, analysts at TD Securities (TDS) said: “The RBA is unlikely to debate the case for hiking but we don't believe the forecasts to reveal the Bank is considering cuts over coming months either. For now, we stick to May 2025 as the first RBA cut.”
How will the RBA interest rate decision impact AUD/USD?
The Australian Dollar (AUD) is moving away from its lowest level in two months against the US Dollar (USD) in the lead-up to the RBA announcements. Will the central bank provide extra legs to the AUD/USD recovery?
The ongoing upswing could continue if the RBA repeats that “the Board is not ruling anything in or out,’ while acknowledging upside risks to inflation. Thus, the Bank’s prudent approach is expected to drive AUD/USD back toward 0.6700.
Conversely, the pair could witness a sharp sell-off toward 0.6500 in case RBA Governor Michele Bullock says in her post-meeting press conference that the Board discussed cutting rates as an option at the meeting.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, notes key technicals for trading AUD/USD on the policy outcome. “AUD/USD has come up for air, testing the 200-day Simple Moving Average (SMA) ahead of the RBA decision. The 14-day Relative Strength Index (RSI) rebounds sharply but remains below the 50 level, currently near 41, keeping sellers hopeful.”
“Buyers need acceptance above the 200-day SMA at 0.6629 for a sustained recovery. The next topside barriers are seen at the 0.6700 threshold and the 50-day SMA at 0.6730. On the flip side, a renewed decline could test the two-month low of 0.6537, below which the 0.6500 level will offer some respite to buyers. Further south, the August 6 low of 0.6472 will come into play,” 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.
Read more.Next release: Tue Nov 05, 2024 03:30
Frequency: Irregular
Consensus: 4.35%
Previous: 4.35%
Source: Reserve Bank of Australia
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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