- Interest rate in Australia is seen on hold at 4.35% for the third consecutive meeting in March.
- Reserve Bank of Australia Governor Michele Bullock will hold a press conference at 04:30 GMT.
- The language in the RBA’s statement and Bullock’s presser hold the key for the Australian Dollar.
The Reserve Bank of Australia (RBA) is widely expected to hold the Official Cash Rate (OCR) steady at a 12-year high of 4.35% following the conclusion of its March monetary policy meeting on Tuesday. The decision will be announced at 03:30 GMT.
With a rates on-hold decision fully baked in, the Australian Dollar’s fate hinges on the tone or language in the policy statement, as well as on Governor Michele Bullock’s comments during the post-policy press conference. The presser will be held at 04:30 GMT.
Reserve Bank of Australia expected to extend the pause, but what’s next?
The RBA is set to extend the pause into the third meeting in a row when it meets on Tuesday. Markets, however, will be focused on fresh signals offered by the central bank on the timing and the scope of a policy pivot.
Economists are divided, with some forecasting an RBA interest rate cut not until November while some expect the Bank to begin lowering rates in September. Amidst the uncertainty around the timing of the rate cut, RBA Governor Michele Bullock’s outlook on inflation and the policy rate will hold the key, as she would take account of slowing economic growth and price pressures.
Data from the Australian Bureau of Statistics (ABS) showed the Consumer Price Index (CPI) rose 0.6% in the fourth quarter (Q4) of last year, under market forecasts for a 0.8% increase. A closely watched measure of core inflation, the trimmed mean, rose 0.8% in the same period, below expectations of a 0.9% increase.
The latest monthly inflation data for January showed that the CPI rose at an annual rate of 3.4%, at the same pace as seen in December while a tad lower than the estimate of 3.5%. Meanwhile, Australia’s annual growth slowed to 1.5% in Q4 from 2.1% the previous quarter, registering its lowest since early 2021.
But, the services inflation, measured by the Wage Price Index, increased 4.2% YoY in Q4, up from a revised 4.1% gain in the third quarter and above the market estimate of 4.1%. The reading was the highest since Q1 2009, with pay growth in both the public and private sectors.
Even though wage inflation remains at elevated levels, Governor Bullock remains confident that it will come down. Testifying before the Australian Parliament last month, Bullock said that “inflation is being persistent, particularly in services. But it is coming down.”
Does this indicate a potential dovish shift in the central bank’s language in the upcoming meeting?
Previewing the RBA policy decision, analysts at TD Securities (TDS) explained, “it should be a fairly straightforward on-hold decision, though the focus will be if the RBA retains its soft hawkish bias. The jobs market has shown cracks after the dismal Dec-Jan prints while monthly CPI reaffirms the disinflation narrative, with the near-term inflation impulse towards the downside. We will keep an eye out on QT plans as the RBA has kept strangely quiet about it.”
How will the RBA interest rate decision impact AUD/USD?
The Australian Dollar (AUD) has entered corrective mode after reaching fresh two-month highs at 0.6667 against the US Dollar last week. The AUD/USD pair could see an extended pullback if Governor Bullock delivers a dovish message, acknowledging the economic slowdown and the gradual decline in inflation. On the other hand, AUD/USD could revert toward multi-month highs should the RBA policymakers retain their hawkish stance.
In its February policy statement, the RBA said that “Further increase in interest rates can’t be ruled out, adding that the board needs to be confident that inflation is moving sustainably towards the target range.”
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, notes key technicals to trade AUD/USD on the policy outcome. “AUD/USD is challenging a powerful confluence support area near 0.6560 in the lead-up to the RBA showdown. That zone is the intersection of the 21-, 50- and 200-day Simple Moving Averages (SMA). The 14-day Relative Strength Index (RSI) is battling the 50 level, suggesting that the pair lacks a clear directional bias ahead of the RBA interest rate decision.”
Dhwani adds: “Aussie buyers need to defend the abovementioned key support near 0.6560 on a daily closing basis to attempt a rebound toward the previous week’s high of 0.6638. The next upside barrier is seen at the 0.6700 round figure. Conversely, a downside break of the 0.6560 support could trigger a fresh downtrend toward the 0.6500 level. The last line of defense for buyers is seen at 0.6479, the March 5 low.”
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.
