RBA expected to hold key interest rate steady, eyes on next direction in interest rates
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- 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
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.
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