AUD/USD and NZD/USD Fundamental Daily Forecast – Aussie Firms after RBA’s Hawkish Policy Decisions
The Australian Dollar is firm on Tuesday after the Reserve Bank of Australia (RBA) hiked interest rates for a ninth successive policy meeting and said “further increases” would be needed, delivering a more hawkish outlook than many analysts had expected.
At 05:30 GMT, the AUD/USD is trading .6935, up 0.0051 or +0.74%. On Monday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $68.00, down $0.50 or -0.73%.
RBA Lifts Cash Rate
The RBA lifted its cash rate by 25 basis points to a decade-high of 3.35 as widely expected. However, it also surprised traders by saying further “increases” would be necessary and implying more than one more hike.
The central bank also omitted its previous condition that policy was not on a “pre-set path”, suggesting further rate hikes were more likely than not.
RBA Concerned about Inflation
The RBA also noted that core inflation had been higher than expected at 6.9% in the December quarter and emphasized that higher rates were needed to ensure that inflation returns to its target range of 2-3%.
“High inflation makes life difficult for people and damages the functioning of the economy. And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later,” warned Lowe as he signaled the bank’s intention to extend the tightening cycle.
Governor Philip Lowe Sets Hawkish Tone
“The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary,” Governor Philip Lowe said in a statement.
Traders were surprised by the hawkish tone of Lowe and RBA policymakers which shattered any expectations of an imminent pause to the tightening campaign. The futures markets have priced in a peak rate of 3.9%, implying at least two more rate hikes in March and April, compared with 3.75% before the decision.
Any chances of a pause in the hiking cycle blew up on Tuesday with the RBA’s explicit comments about the need to further hike rates.
The surprise was not in the 25 basis point rate hike, but rather the shift to the hawkish tone and forward guidance in the Governor’s Statement. The wording was strong enough to imply that the RBA Board has essentially made up their collective minds and intend to raise the cash rate at least two times over the coming months.
However, future rate hikes will still be data dependent with policymakers assuming fresh economic data will be in sync with their updated forecasts. According to the latest forecast, inflation is expected to decline to 4.75% this year and only slow to around 3% by mid-2025. The RBA’s target range is 2-3%.