RBA’s Bullock: Believe rates need to stay restrictive for time being
|Reserve Bank of Australia (RBA) Governor Michele Bullock is speaking at the press conference, following the announcement of the November monetary policy decision on Tuesday.
Bullock is responding to questions from the media, as part of a new reporting format for the central bank starting this year.
The RBA maintained the benchmark interest rate at 4.35% for the eighth straight meeting earlier this Tuesday.
Key quotes
Labor market remains tight.
Wage growth continue to ease.
Policy settings are restrictive.
Believe rates need to stay restrictive for time being.
Think there are still risks on upside for inflation.
Rises of 0.8% in core inflation would not take us back into the band.
Have right settings at moment.
If economy turns down more than expected, will be ready to act.
Need to be convinced core inflation heading back into band.
It does not necessarily mean inflation needs to be back in the band before we start acting.
Discussion today was similar to the September meeting.
The conversation was more centered around "what we needed to see to change our mind" on policy.
Want to preserve strong labor market.
Current cash rate path priced by market is as good as any.
Risks are fairly balanced on inflation, policy.
Housing consumption, slow productivity are two risks.
But we are prepared to move if the data suggests to do so.
We can't ignore risks from overseas developments but our main focus is on the domestic front.
Market reaction
AUD/USD is holding gains near 0.6600 on the above comments, up 0.11% on the day, as of writing.
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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