The Reserve Bank of Australia (RBA) published the Minutes of its April monetary policy meeting on Tuesday, which showed that board members agreed the May meeting would be an opportune time to reconsider, decision was not predetermined.
Additional takeaways
- Not yet possible to determine timing of next move in rates.
- Not appropriate at this stage for policy to react to potential risks.
- Possible that global uncertainty over U.S. tariffs could have significant impact.
- Global risks to growth had increased, were tilted to the downside.
- Board saw risks on upside and downside for Australian economy and inflation.
- Important to safeguard progress on inflation and not ease policy "prematurely".
- Labour market still considered tight, labour costs too high and productivity low.
- Possibility labour market not as tight as thought, wage growth could continue to slow.
- Trimmed mean inflation likely fell below 3% in Q1.
- Data pointed to genuine improvement in consumer demand, beyond just sales events.
- Board considered run down of RBA government bond holdings, saw no reason to change pace.
- Governance board to consider risks in scale and maturity of bond holdings.
Market reaction
AUD/USD jumped to test 0.6350 following the RBA Minutes release. The pair is currently trading at 0.6337, up 0.84% on the day.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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