Pre-Christmas RBA Rate Decision Will Likely Be on Hold

Key Takeaways

• The November rate hike decision was a pointed way to impact consumer inflation, which rose 5.6% in September, up from 5.2% and 4.9% in August and July, respectively.
• Current price rises and general economic conditions in Australia give the RBA a reason to resume its pause in interest rate hikes.
• The RBA decision on the interest rate is likely to lead to the weakening of the national currency—the nearest target for AUDUSD is 0.6500–0.6520

In the previous November meeting, RBA raised the cash rate by 25 bps—to 4.35%. The decision looked unexpected amid the 4-month pause. It was a spot fix to the suddenly accelerating inflation. According to Australian Bureau of Statistics data released on 25 October, the monthly CPI indicator rose 5.6% in September, up from a rise of 5.2% and 4.9% in August and July, respectively.

‘It is clear that interest rates are no longer appropriate as the only tool to control inflation. According to the RBA rate tracker, the probability of a pre-Christmas interest rate increase is small and less than 10%,’ said Kar Yong Ang, Octa’s financial market analyst. ‘In such a case, if the RBA decides to pause, the Australian dollar will weaken in the short term’, he added.

The RBA is in the curious position, being one of the few central banks in the developed world that is still tightening policy when markets are convinced that rates in the U.S., Canada, and Europe have peaked. The current price growth and the economic situation in Australia in general give the RBA a reason to resume the pause in interest rate hikes, which could be the beginning of a downward cycle. Such a decision will weaken the national currency: the near-term target for AUDUSD is 0.6500–0.6520.

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