Bullock Speech: RBA Governor speaks on policy outlook after holding interest rate

Reserve Bank of Australia (RBA) Governor Michele Bullock is addressing the press conference following the May monetary policy announcement.

Bullock is taking questions from the press, as part of a new reporting format for the central bank.

At its May policy meeting, the RBA kept the policy rate unadjusted at 4.35% for the fourth meeting in a row. The central bank, however, remained non-committal on the next interest rate move.

RBA press conference key highlights

“We must be vigilant on inflation risks.”

“We believe rates are at the right level to get inflation back to target.”

“Data are proving bumpy, we are taking a longer view.”

“We want to keep employment growing, but there are risks.”

“We will adjust policy as needed.”

“ The government is conscious that the budget should not add to inflation pressures.”

“I don't think we necessarily have to tighten again.”

“We should not read too much into technical assumptions on rate forecasts.”

“We have not explicitly said we might hike rates again.”

“I still think risks are evenly balanced.”

“Market pricing still feels rather reasonably balanced at the moment.”

“But it tells us that we have to be very watchful.”

“It will be more costly to end up with higher inflation than lower inflation.”

 

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This section below was published at 04:30 GMT to cover the Reserve Bank of Australia's monetary policy announcements and the initial market reaction.

The Reserve Bank of Australia (RBA) board members decided to keep the Official Cash Rate (OCR) unchanged at 4.35% after its May monetary policy meeting on Tuesday.

The policy announcement was widely expected by the markets. The RBA extended its pause for the fourth meeting in a row, having lifted the rate by 25 basis points (bps) in November 2023.

RBA’s Governor Michele Bullock presented the monetary policy statement, with the key takeaways noted below.

“Inflation continues to moderate, but is declining more slowly than expected.”

“The economic outlook remains uncertain.”

“Recent data have demonstrated that the process of returning inflation to target is unlikely to be smooth.”

“Persistence of services inflation is a key uncertainty.”

“Household consumption growth has been particularly weak.”

“There also remains a high level of uncertainty about the overseas outlook.”

“It will be some time yet before inflation is sustainably in the target range and will remain vigilant to upside risks.”

“Not ruling anything in or out on future decisions.”

"Recent data indicate that, while inflation is easing, it is doing so more slowly than previously expected and it remains high. The Board expects that it will be some time yet before inflation is sustainably in the target range and will remain vigilant to upside risks."

AUD/USD reaction to the RBA interest rate decision

The Australian Dollar faces some selling pressure in an immediate reaction to the RBA’s expected pause. The AUD/USD pair is losing 0.40% on the day to trade near 0.6600.

15-minutes chart

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This section below was published on May 7 at 22:45 GMT as a preview of the Reserve Bank of Australia (RBA) policy announcements.

• Interest rate in Australia will likely stay unchanged at 4.35%.
• Reserve Bank of Australia Governor Michele Bullock to keep her options open. 
• Australian Dollar bullish case to be supported by a hawkish RBA.

The Reserve Bank of Australia (RBA) will announce its decision on monetary policy early on Tuesday. Australian policymakers are widely anticipated to keep the Official Cash Rate (OCR) unchanged at 4.35%. In the March meeting, the RBA moved away from the tightening bias, scrapping references to potential rate hikes from the Board’s statement. As a result, the Australian Dollar (AUD) plummeted.

But much water has passed under the bridge since then. On the one hand, the Monthly Consumer Price Index (CPI) rose 3.5% YoY in March, while on the other hand, the latest wage growth figure indicated persistent upward pressures. Wages increased 4.2% YoY in the last quarter of 2023.

Reserve Bank of Australia expected to remain on hold, but what else?

The RBA is not expected to change the OCR, but market players are concerned policymakers may reinstate the hawkish stance. The uptick in inflation, coupled with a persistently tight job market, spooks away any chance of a rate cut in the near term. In fact, speculative interest is more keen to bet on upcoming rate hikes before year-end than on a reduction of the interest rate benchmark. The idea seems quite logical as the RBA stalled rate hikes well below its main counterparts. 

Ahead of the announcement, speculation mounts that Governor Michele Bullock and co. will opt out to reopen the door for additional tightening, with market participants increasingly beating on a rate hike in November 2024. 

Governor Bullock noted in the press conference following the March decision that she wouldn’t rule anything in or out, adding that she needs to be confident that inflation is sustainably moving towards the central bank target range of 2%-3%. Indeed, she sounded confident back then, but the optimism diluted as macroeconomic data did not support the loosening case.

The CPI rose 1.0% in the first quarter of the year, according to the Australian Bureau of Statistics (ABS). The same report showed that, over the twelve months to the March 2024 quarter, the CPI rose 3.6%, actually lower than the 4.1% annual rise in the previous quarter. It was the fifth consecutive quarter of lower annual inflation, although the trimmed mean annual inflation held at 4%, still above the RBA’s goal. 

Furthermore, analysts at TD Securities noted that the latest employment data from Australia will not prompt the RBA to lower the policy rate anytime soon. "Australian headline employment fell 6.6k in March, softer than the +10k consensus and TD's +18k f/c. Given the significant increase in jobs posted in February, a much larger giveback could have happened, so the 6.6k drop is not too bad. Driving the negative print was the 34.5k drop in part-time, but full-time rose 27.9k (this is strong) while there were upward revisions to headline and full-time for February.” 

Investors have spent most of this year betting on the dates major central banks will trim interest rates, pricing in sooner or later movements. However, that’s not the case in Australia, beyond the 30% odds a rate hike could come in November. Nothing, however,  is priced in the country, and Tuesday’s announcement could put speculative interest in a certain path, spurring some aggressive price action around the AUD.

The RBA will include fresh economic forecasts. In February, the central bank was expecting trimmed mean inflation would decline to 3.1% by the end of 2024 and to 2.8% a year later. Inflation was then seen returning to the 2%-3% target by mid-2024. On growth, policymakers forecasted Gross Domestic Product (GDP) growth will slow to 1.3% in the second quarter of the year and slowly pick up afterwards to reach 2.4% by mid-2026. 

However, with hotter-than-anticipated inflation in the first quarter of the year, the RBA will likely review its inflation forecasts. Growth figures, on the contrary, will likely suffer minor revisions. Market players will pay more attention to the long-term projections and whether the June 2026 line is moved further away.

How will the RBA interest rate decision impact AUD/USD?

The AUD/USD pair trades above the 0.6600 mark ahead of the announcement, as the US Dollar suffers from a not-that-hawkish Federal Reserve (Fed). The US central bank has made it clear that interest rates will remain high for longer, although policymakers maintain the door open for rate cuts later this year.

Financial markets are optimistic despite global signs of stubbornly high inflation, while stock markets’ strength further underpins AUD/USD. 

Valeria Bednarik, FXStreet Chief Analyst, says: “The AUD/USD pair will likely extend its rally, should the RBA deliver a hawkish message. Flipping back to potential rate hikes could be a nice catalyst for those looking to add longs. The pair has met sellers in the 0.6640 price zone in March and in the 0.6660 area in April, meaning large stops should accumulate above the latter. If those get triggered, a rally towards 0.6700 seems likely. The next resistance level is 0.6730, while the final target comes at 0.6770.”

Bednarik adds: “Speculative interest may be quite disappointed if the statement remains the same. AUD/USD could drop towards the 0.6560 price zone, while a break below the latter exposes the 0.6500 mark.”