AUD: RBA slower for longer

RBA Deputy Governor Michele Bullock, as well as the RBA Minutes to the October
meeting, made apparent that the decision between a 25bp and 50bp rate hike in
October was finely balanced and that despite this fine balance, the central bank is
unlikely to re-ramp up to 50bp rate hikes again and would prefer to continue to
increase the cash rate in 25bp increments for longer. The Minutes and Bullock
gave sound reasons for this logic: (1) the cash rate had increased at a steeper rate
than many other central banks and was now in the lower end of the neutral range;
(2) the impact of earlier rate hikes as well as the increase in fuel prices with the
reinstatement of the full fuel price levy were yet to be felt; (3) Australia’s enterprise
wage setting system lent itself less to steep rises in wages that have been
experienced in other countries; (4) Australian households are more sensitive to
rate hikes due to variable rate mortgages, and falling house prices have in the past
had a significant impact on household consumption via the wealth effect;
(5) inflation expectations remain well anchored; and (6) the RBA meets more
frequently than other central banks and so, while not raising rates as rapidly each
meeting going forward, it can still raise rates as quickly over time as others due to
the greater frequency of its meetings. We continue to think the RBA will raise its
cash rate by about another 90bp to 3.50%, which still leaves the central bank
significantly trailing the Fed and weighs on the AUD/USD. In answering a question
about the exchange rate, Bullock said that while the currency features in the RBA’s
decisions, it did not drive the decisions. In other words, the RBA takes into account
the AUD’s impact on inflation and that is about it. Importantly, it is also noted by
the RBA that while AUD/USD has been heading lower, it has fallen less on a TWI
basis.

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