The Reserve Bank of Australia (RBA) raised its cash rate by 0.25% to 4.35% following the latest meeting of the Bank’s Board. The Australian Dollar has responded with sharp losses, falling about 1% in the aftermath of the decision.
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The RBA had investors on the edge of the seats right up until the rate decision, as the rate odds ahead of the meeting were split 50/50 between a pause and a quarter-point hike. The RBA rate hike comes after four straight pauses.
The RBA revised its inflation forecast slightly higher to 3.5% by the end of 2024 and also lowered its projection for peak unemployment to 4.25%. This signals an acknowledgment of resilience in the economy, despite the central bank’s aggressive tightening.
An increase in interest rates often provides a boost to the local currency, which makes the Australian dollar’s sharp decline somewhat puzzling. The answer appears to lie in the RBA statement, which said that “an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe.”
This points to a loosening in the RBA’s tightening bias, with the RBA expecting inflation to continue falling and returning to the 2%-3% target range. This has raised market expectations that the RBA could be done with its tightening cycle or is close to the end.
Governor Bullock added the usual text in her statement that future rate decisions would be data-dependent and could include rate increases, but markets perceived today’s move as a “dovish hike” due to the change in language which indicated a softer tightening bias. This resulted in the Aussie getting steamrolled by the US Dollar.
Inflation remains the RBA’s number one priority, and the battle is expected to be lengthy. The RBA expects that inflation will not fall back within target until the end of 2025 and Governor Bullock admitted in her statement that “progress looks to be slower than earlier expected” and that the risk of inflation remaining “higher for lower” has increased.
In the Forex market, the Australian Dollar has fallen sharply on Tuesday following today’s rate hike, as investors focused on the dovish language of the RBA statement. The Australian Dollar against the US Dollar has declined 0.99% and is currently trading at 0.6425.
Interestingly, equity markets have also dropped following the RBA decision. The S&P ASX 200 stock market index fell as much as 40 points today but has partially recovered and is currently trading at 6977.10, down 20.30 points (-0.29%).