Are the RBA toying with a terminal rate of 3.6%?

• The RBA held interest rates at 3.6%
• This breaks a record streak of 10 consecutive hikes totalling 350bp
• Statement reference that policy ‘may’ need to be tightened (previously ‘will’ be tightened)
• AUD/USD pulls back from yesterday’s highs, but a weaker USD is supporting prices

 

Well, that settles it. Money markets were correct in calling a pause, and those calling for a hike are still calling for another hike. And that may well be the case with inflation being so high. But, the RBA do seem to think they have some more time to mull over the data after a record streak of 10 consecutive hikes, totalling 350bp. In reality, there’s a decent chance we’ll get another hike, but they seem content that inflation has peaked and opted to ‘not’ pull the hiking trigger ahead of the quarterly inflation report in a few weeks.

But if we skip to the final paragraph, a subtle but big change has occurred. The RBA concede that monetary policy ‘may’ need to be tightened, whereas previously it said policy ‘will’ need to be tightened. Even if further tightening materialises, they have allowed the potential for a terminal rate of 3.6%, even if it is a lower probability scenario. And unless the RBA are presented with a surprise uptick on the quarterly inflation print, I think the RBA will be happy to sit with 3.6% for the next 2-3 months. And who knows, perhaps they’re sat on a 15bp hike in future to get us back onto the traditional 25bp increments.

 

AUD/USD 4-hour chart:

 

The Aussie has pulled back from a resistance cluster which included a 38.2% Fibonacci ratio, weekly/monthly R2 pivots and prior cycle highs. There’s a reasonable chance it could continue to pull back to the 0.6738 high / daily R1, but whether it continues lower or prints a swing low ahead of a breakout could be down to whether the US dollar continues to weaken overnight. And with concerns of a US recession on the rise, a weak JOLTS employment report and factory orders could send the USD lower still.

 

 

Summary of the RBA’s April statement

• Monetary policy operates with a lag
• Held rates to assess the impact of tightening cycle
• The Australian banking system is strong
• The monthly CPI indicator (amongst others) suggests that inflation has peaked in Australia
• Goods price inflation is expected to moderate over the months
• Medium-term inflation expectations remain well anchored, and it is important that this remains the case
• The labour market remains very tight
• … unemployment is expected to increase
• The Board expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target
• In assessing when and how much further interest rates need to increase, the Board will pay close attention to the global economy, trends in household spending and the outlook for inflation and the labour market.

 

 

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

 

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