RBA waiting to take action

The Reserve Bank of Australia left its cash rate unchanged at 4.35% this morning. Most economists, as well as the market, were expecting no change. As a result, the Aussie's reaction to the meeting was muted. Despite the unchanged policy rate however, there were a few interesting points to take away from the communiqué and press conference, Commerzbank’s FX analyst Volkmar Baur notes.

Aussie can come under pressure next year

“For one, the RBA had said in September that it would wait until inflation was back within the central bank's target range. Now they have added the word 'sustainably'. So they now want to wait for inflation to return ‘sustainably’ to the target range. This could mean that they are still waiting for core inflation to fall below 3% per annum. Since, although inflation itself fell below 3% in the third quarter, this was largely due to lower energy prices. On the other hand, it could also be that they just want to buy some time to wait and see.”

“The labour market is still very strong and is creating significantly more jobs each month than before the pandemic. This is leading to continued high wage growth, which is putting further pressure on inflation, especially in services. It is therefore also possible that this 'sustainable' view on inflation indicates that inflation is indeed seen to be on the right track, but that the labour market remains the sticking point, which is why inflation risks are still seen to be on the upside.”

“We can expect the Reserve Bank of Australia to pay more attention to the labour market in the coming months, with a view to cutting interest rates in response to any weakening. As long as inflation does not pick up again significantly, it is likely to recede somewhat as an indicator of future RBA policy. And since I expect the Australian economy to slow next year, the RBA is likely to cut rates before May 2025, the date currently priced in by the market. The Aussie could therefore come under pressure next year.”

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