AUD/USD Jumps as RBA Opens Door to Tightening

The Australia Dollar is soaring early Tuesday, touching its highest level since June 2021, despite the Reserve Bank of Australia (RBA) decision to keep the cash rate target unchanged at 0.1%. The move by the Aussie also helped boost demand for the risk-sensitive New Zealand Dollar.

At 05:12 GMT, the AUD/USD is trading .7604, up 0.0060 or +0.80%. The NZD/USD is at .6978, up 0.0027 or +0.39%. On Monday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $74.76, up $0.36 or +0.49%.

RBA Keeps Interest Rates on Hold as Cost of Living Woes Grow

Early Tuesday, the RBA announced it has kept interest rates at the historically-low level of 0.1 percent, despite rising concerns around the soaring cost of living for ordinary Australians.

The central bank’s policymakers decided to reserve their right to increase rates, which have been at the current level since November 2020.

The RBA has long maintained that it would require inflation to be sustainably in the two to three-percent range before it would consider lifting rates.

“The Board has wanted to see actual evidence that inflation is sustainably within the 2 to 3 percent target range before it increases interest rates,” said RBA Governor Philip Lowe. “Inflation has picked up and a further increase is expected, but growth in labor costs has been below rates that are likely to be consistent with inflation being sustainably at target.”

“Housing prices have risen strongly over the past year, although some housing markets have eased recently,” RBA Governor Philip Lowe said in his monetary statement.

“With interest rates at historically low levels, it is important that lending standards are maintained and that borrowers have adequate buffers.”

Currently Australia’s headline inflation is 3.5 percent, but Dr. Lowe has previously said the bank was prepared to be patient in creating a move that would inevitably increase the pressure on households already burdened by mortgage stress.

Experts Speculate on Timing of Future Rate Hikes

Despite no change in this month’s meeting, many – including Australia’s biggest banks – have speculated that the RBA will hike up interest rates from as early as June 2022.

Almost all lenders now believe that 2022 will feature not one but multiple rate hikes, to lift Australia’s cash rate to around 1.5 percent by the end of 2023.