RBA Minutes: Members see case for rate hike as inflation expectations risk grows
The Reserve Bank of Australia (RBA) published the Minutes of its May monetary policy meeting this Tuesday, which showed that eight members saw case for rate hike as strongest and one member preferred to await further data.
Additional takeaways:
Hike would give board space to see how gulf conflict developed, response of households and business.
Board judged financial conditions would be somewhat restrictive after may hike.
For future decisions, board agreed monetary policy could not alter the near-term trajectory of inflation.
Board agreed Australian economic growth likely to be below potential for some time.
Board will do what it considers necessary to meet inflation, employment mandates.
Majority emphasised core inflation was projected above target for extended period.
Board considered whether to hike by 25bps or to keep rates at 4.10%.
Eight members considered case for hike to be strongest, one wanted to wait for more information.
Judged additional loosening in the labour and product markets was needed given inflation risks.
Majority felt risks to inflation objective had risen, not confident 4.1% enough to offset risks.
Saw risk longer-term inflation expectations could become de-anchored.
One member felt capacity pressures not as great, protracted war more of a risk to demand.
Member expected inflation to return to target without further tightening.
Market Reaction:
The Australian Dollar (AUD) remains weak following the RBA Minutes. At the time of writing, the AUD/USD pair is trading 0.24% lower on the day to trade at 0.7150.
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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