Australia Interest Rate Preview: RBA to stay put, focus on Governor Bullock's speech

08/06/2024 02:45:00 GMT|ByFXStreet Team

Interest rate in Australia is expected to remain unchanged in August.

Reserve Bank of Australia Governor Michele Bullock speech could shed light on the Board's path.

The Australian Dollar under pressure ahead of the verdict.

The Reserve Bank of Australia (RBA) will announce its monetary policy decision on Tuesday, August 6. The central bank is expected to maintain the Official Cash Rate (OCR) unchanged at 4.35% amid stubbornly high inflation. Following the announcement, Governor Michele Bullock will hold a press conference in which she will likely explain the reasons behind the decision and, luckily, offer some hints on what policymakers may do next.

Ahead of the announcement, the Australian Dollar (AUD) is under strong selling pressure amid risk-aversion. Financial markets are all about central banks these days, with mounting hopes the United States (US) Federal Reserve (Fed) will begin loosening monetary policy as soon as September. Even further, market participants are pricing in the US central bank kicking off the new cycle by cutting interest rates by 50 basis points (bps).

Reserve Bank of Australia expected to extend the pause, but what’s next?

But fears are not just because of the Fed. The Bank of Japan (BoJ) is also in the eye of the storm these days as policymakers have finally moved into a more aggressive tightening. The BoJ decided to raise the near-term rate target by 15 bps to 0.15%-0.25% when it met last week, also announcing they would reduce their monthly bond buying by around ¥400 billion each quarter. The decision came after the Japanese Yen (JPY) plummeted to multi-year lows against the US Dollar and was clearly a decision to support the local currency rather than a measure related to inflation.

Back to the RBA, policymakers will likely discuss either holding or hiking, with a rate cut out of the table. When the Board met last June, it noted that the case for a rate rise “could be further strengthened” if supply in the economy was “likely to be more constrained than had been assumed,” and moreover, considering “productivity growth remained very weak.”

Australia reported inflation data last week, and the news were far from good. According to the Australian Bureau of Statistics (ABS), the Consumer Price Index (CPI) rose 1.0% in the second quarter of the year and 3.8% over the twelve months to the June 2024 quarter. The latter came in line with the market expectations but higher than the 3.6% posted in the first quarter of the year.

Meanwhile, the RBA Trimmed Mean CPI, the central bank’s favorite inflation gauge, rose 0.8% QoQ and at an annualized pace of 3.9% in the three months to June, slightly below expected. Finally, the Monthly CPI rose by 3.8% YoY in June, below the previous 4% but still above the RBA’s goal of 2% - 3%.

Australian inflation is not at a point to trigger a rate hike, but given the latest data, the odds for a rate cut are pretty much null.

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

Ahead of the announcement, market players are anticipating a “hawkish hold.” Policymakers will likely keep the OCR at 4.35% for a sixth straight meeting on Tuesday and refrain from discussing rate cuts but instead maintain the focus on persistent inflationary pressures and leave the door open for a potential hike.

Governor Michele Bullock and co will probably reiterate that they need to be confident that price growth is moving sustainably back to the central bank’s inflation goal and that, in such a scenario, they are not ruling anything in or out.

If that’s the case, the AUD could find some near-term strength, although it should be short-lived, given the risk-averse environment and the decision matching expectations. A dovish stance, however, will come as a big surprise and could trigger a massive Aussie sell-off.

The AUD/USD pair trades around 0.6450 ahead of the event and after plummeting to 0.6347 at the beginning of the week amid mounting tensions in the Middle East and central banks’ imbalances.

Valeria Bednarik, FXStreet's Chief Analyst, says, “The AUD/USD pair is extremely oversold, yet there are no technical signs of downward exhaustion. However, the accumulative 350 pips slump and the expected hawkish hold from the RBA could help the pair correct higher. The immediate resistance level is the 0.6500 - 0.6520 price zone, with gains beyond the latter unlikely unless a hawkish surprise. In such a scenario, AUD/USD could surge towards 0.6570.”

Bednarik adds: “A break through the 0.6400 mark should lead to a retest of the aforementioned low at 0.6347, moreover if risk aversion continues to dominate financial boards ahead of the announcement. A test of the 0.6300 mark is on the cards, should the latter give up.”

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

Economic Indicator

RBA Press Conference

Following the Reserve Bank of Australia’s (RBA) economic policy decision, the Governor delivers a press conference explaining the monetary policy decision. The usual format is a roughly one-hour presser starting with prepared remarks and then opening to questions from the press. Hawkish comments tend to boost the Australian Dollar (AUD), while on the opposite, a dovish message tends to weaken it.

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