- Interest rate in Australia is likely to remain unchanged at 4.10% in September.
- The Reserve Bank of Australia could leave the door open for more interest rate hikes.
- RBA policy guidance set to ramp up volatility around the Australian Dollar.
The Reserve Bank of Australia (RBA) is set to follow the US Federal Reserve (Fed) and stand pat on Tuesday when it will announce its interest rate decision..
After surprising markets in four out of its last five policy announcements this year, the RBA is likely to offer no fireworks at Governor Philip Lowe’s last policy meeting.
Reserve Bank of Australia interest rate decision: All you need to know on Tuesday, September 5
- AUD/USD is sitting at five-day lows below 0.6450, as the US Dollar clings to recovery gains amid a cautious market mood.
- US S&P 500 futures post small losses, as worries over China’s property sector loom. Meanwhile, the benchmark 10-year US Treasury bond yield recaptures the 4.20% level, up nearly 1% on the day.
- More policy action is expected from China, including relaxing restrictions on home buying. China’s embattled property developer, Country Garden, won approval from its creditors to extend payments for an onshore private bond on Monday.
- China’s Caixin Manufacturing Purchasing Managers’ Index (PMI) jumped back into expansion territory, coming in at 51.0 in August when compared to July’s contraction of 49.2. The data surprised the market to the upside, as expectations were for a 49.3 reading.
- US Nonfarm Payrolls data showed that employment rose by 187K in August, as against expectations of 170K. However, the previous reading was revised down sharply to 157K. Further, the US Unemployment Rate unexpectedly climbed to 3.8% while the annual Average Hourly Earnings rose 4.3% in August on year, compared with the expected increase of 4.4% in the reported month.
- The RBA interest-rate decision will likely provide near-term direction in the AUD/USD pair amid a relatively data-light week. The Australian central bank’s outgoing Governor Philip Lower is scheduled to deliver a speech titled “Some Closing Remarks” at the Anika Foundation, in Sydney, on Friday.
RBA interest rates expectations: How will it impact AUD/USD?
The Reserve Bank of Australia is widely expected to maintain the Official Cash Rate unchanged at 4.10% following its September monetary policy meeting scheduled on Tuesday. The decision will be announced at 04:30 GMT.
Testifying before the Australian Parliament’s House of Representatives Standing Committee on Economics in early August, RBA Governor Phillip Lowe said, “it is possible that some further tightening of monetary policy will be required to ensure that inflation returns to target within a reasonable timeframe but that will depend upon the data.” “Rates are restrictive so we are in the calibration stage with policy,” he said.
Inflation in Australia has cooled down significantly while the labor market conditions have loosened up, making a perfect case for an extended pause by the RBA. Australia’s Consumer Price Index (CPI) inflation slowed to a 17-month low of 4.9% in the year to July. A closely watched measure of core inflation, the trimmed mean, eased to 5.6% from 6.0%.
The country’s Unemployment Rate ticked higher to 3.7% in July, as against the expectations of 3.5% and the previous reading of 3.5%. Employment declined by 14.6K in July, compared with the consensus forecast of a 15K increase and 32.6K jobs addition seen in June. Deteriorating labor market conditions ease pressure on wage growth and demand-driven inflation.
Economists are expecting Governor Lowe to make no changes to the interest rate at his last meeting on September 5, as incoming Governor Michele Bullock takes over the reins on September 18 for a seven-year term. The RBA Governor-Designate said in a speech last week in Canberra that the central bank “may have to raise rates again, but watching data carefully.”
Bullock added, “inflation is still too high, that will be my first priority as governor.” Therefore, it seems that the RBA may leave the door open for more tightening, delivering a mildly hawkish outlook this week.
“Among major local banks, ANZ, CBA, and Westpac expect rates to remain unchanged until at least end-2023 while NAB predicted one more rate hike to 4.35% in November. Slightly less than two-thirds of respondents, 21 of 35, said rates would reach 4.35% or higher by end-year,” findings from the latest survey conducted by Reuters showed.
Economists at Standard Chartered offered their expectations from the RBA going forward, citing: “we lower our terminal rate forecast by 25bps but maintain a 25bps hike projection in November. Recent signs, including lower-than-expected CPI prints, allow RBA to adopt a wait-and-see approach. However, we see little margin for upside surprise to inflation given the already-patient RBA stance.”
The RBA forward guidance is set to rock the Australian Dollar, as traders will closely scrutinize the language in the monetary policy statement for hints on the central bank’s future interest rate path.
Meanwhile, Dhwani Mehta, Asian Session Lead Analyst at FXStreet, notes key technicals to trade AUD/USD on the policy outcome. “AUD/USD is struggling around the 21-day Simple Moving Averages (SMA) at 0.6465 in the run-up to the RBA showdown. The 14-day Relative Strength Index (RSI) holds below the 50 level, keeping the downside risks intact for the Aussie.”
“If the 0.6400 support caves in, then a fresh downswing toward the August low of 0.6364 will be in the offing. Further down, the 0.6300 round figure will be challenged. On the flip side, acceptance above the 0.6522 static resistance is needed to initiate a meaningful recovery toward the 0.6600 level. The next topside barrier is seen at the August 2 high at 0.6630,” Dhwani added.
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.