- Interest rate in Australia set to remain steady at 4.35%.
- Reserve Bank of Australia Governor Michele Bullock not expected to change the tone.
- The Australian Dollar is poised to extend its slump against the US Dollar.
The Reserve Bank of Australia (RBA) will announce its monetary policy on Tuesday and is widely anticipated to keep the Official Cash Rate (OCR) unchanged at a 12-year high of 4.35%.
The RBA has changed the number of monetary policy meetings in 2024, reducing the number of the Board’s meetings from eleven to just eight times a year. Officials decided to cut back the number of meetings so the Board could have more time to assess economic developments.
Incoming data since the December decision has shown inflation retreated sharply while growth remains tepid, justifying market expectations of a no-chance in the OCR.
Reserve Bank of Australia to stand pat as inflation eases, growth weakens
With the OCR seen steady at record highs, the focus will be on the accompanying statement and Governor Michele Bullock’s press conference. Back in December, the RBA statement noted: “Inflation had continued to decline but remained high. Wages growth had reached 4 per cent a little sooner than had been expected but the staff judged that wage growth was unlikely to rise much further. Output growth had continued below trend and the labour market was tight but easing gradually. Members agreed that financial stability considerations were not a constraint on monetary policy at the current meeting.”
Australian policymakers maintained the wording related to additional rate hikes amid expectations inflation would remain above target for a prolonged period. However, the latest figures were quite encouraging. The Consumer Price Index (CPI) rose 0.6% in Q4, easing from 1.2% in the previous quarter and below the 0.8% expected, according to the Australian Bureau of Statistics (ABS). The central bank’s favorite gauge, the RBA Trimmed Mean CPI rose 0.8% in the same period and 4.2% from a year earlier, the latter easing from 5.1% in Q3. Finally, the Monthly Consumer Price Index was up 3.4% YoY in December after printing at 4.3% in the previous month.
The RBA then has easing inflation but also softening economic activity as the base case for the January decision. In such a scenario, most economists expect no changes to the statement wording, with policymakers maintaining the door open for additional hikes if needed. Rate cuts will most likely remain out of the table. Money markets are not looking into a pivot in monetary policy in the first half of the year.
The Australian Dollar (AUD) may come under selling pressure if policymakers choose a more dovish tone to express their view of the future of monetary policy. Yet retaining the hawkish stance may not give fresh impetus to the Aussie, as lately, investors prefer to bet on rate cuts and ignore central bankers.
Governor Bullock has warned about the upside risks of inflation and may ease the tone there, but given the labor market remains tight, she most likely will maintain the cautious tone. Recent data showed a sharp slide in the number of employed individuals, with the monthly report indicating a 65.1K decline in job positions in December, while the Unemployment Rate held steady at 3.9%. Also, the Participation Rate slid from 67.3% to 66.8%.
How will the RBA interest rate decision impact AUD/USD?
The AUD/USD pair trades at its lowest since last November on Monday, amid broad US Dollar demand. The Australian Dollar (AUD) has fallen against its American rivals in the last five weeks, and started this one by extending its slump. The pair trades below the 0.6500 threshold, and in the long run, it has room to extend the slide.
Valeria Bednarik, Chief Analyst at FXStreet says: “The bearish momentum is evident in the daily chart, as the pair finally slid below its 100 SMA (Simple Moving Average) for the first time since mid-November, and after buyers battled throughout January to defend the area. At the same time, the 20 SMA accelerated its decline above the longer one, reflecting persistent selling interest. Finally, technical indicators suggest bears are willing to keep selling, as per aiming south within negative levels.”
Furthermore, Bednarik notes: “The current price zone seems lacking a relevant level that could provide support. Sellers will be looking for a downward extension towards 0.6450, aiming then to reach the 0.6370/80 area. Given the US Dollar’s broad strength, AUD/USD could extend its slide towards 0.6300/30 following the event. To the upside, the level to watch is the aforementioned daily 100 SMA, currently at around 0.6530. Once above the latter, the recovery could continue towards 0.6600, where sellers are expected to jump back in.”
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.