RBA to keep interest rates unchanged, focus on Governor Bullock rhetoric

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.”

Australian Dollar FAQs

What key factors drive the Australian Dollar?

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.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

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.

How does the health of the Chinese Economy impact the Australian Dollar?

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.

How does the price of Iron Ore impact the Australian Dollar?

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.

How does the Trade Balance impact the Australian Dollar?

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.

Economic Indicator

RBA Monetary Policy Statement

At the end of each of the Reserve Bank of Australia (RBA) eight meetings, the RBA’s board releases a post-meeting statement explaining its policy decision. The statement may influence the volatility of the Australian Dollar (AUD) and determine a short-term positive or negative trend. A hawkish view is considered bullish for AUD, whereas a dovish view is considered bearish.