The Reserve Bank of Australia kept rates unchanged amid concerns its 4 percentage points of hikes since May 2022 could slow the economy more sharply than forecast.
It should be noted that this was Michele Bullock's first policy meeting as the new governor of the RBA.
Australia's central bank considered raising interest rates this month, but decided it was worth leaving policy unchanged while signaling it was ready for further tightening if it took too long to get back to target levels to contain inflation.
Officials noted that an interest rate of 4.1% was already having a positive effect on lowering inflation.
The RBA Council decided the case to stand pat was “stronger” because the policy tightening campaign is already having an impact.
The board also highlighted that “the labor market had reached a turning point and the challenges in the Chinese economy could lead to slower growth in Australia.”
Australia’s job market remains tight with unemployment hovering in a 3.4-3.7% range over the past year. Other readings on the economy point to a reasonable impulse with business conditions showing ongoing resilience and job vacancies remaining high. The residential property market has also unexpectedly rebounded strongly this year.
RBA Members noted that “while rising housing prices alone would not warrant tighter policy, the associated rise in household wealth could support consumption by more than currently assumed, especially if housing turnover were to pick up more quickly than expected.”
At the same time, economists and traders latched on to a new sentence in the minutes that said “the board doesn’t tolerate a slower return of inflation to the target level.” In response, AUDUSD rose as much as 0.3% against the dollar and yields on the policy-sensitive three-year government bonds jumped 10 basis points to 4.05%.
The minutes “read more hawkishly than the September set,” said Adam Boyton, head of Australian economics at ANZ Banking Group Ltd. “Our view is that a rate rise in November would require an uncomfortably high CPI print, possibly combined with some sign of strength in the labor market.”
Monthly employment data will come out Thursday and the third-quarter inflation report will be released next week. The central bank will also receive its staff’s quarterly update of economic forecasts at the Nov. 7 meeting.
The RBA said in the minutes that the case to raise rates centered on the risk that inflation might prove stickier than anticipated and may not meet the forecast for it to fall back within the 2–3% target by late 2025.
With this in mind, one should keep a close eye on the upcoming Australian employment and inflation data releases.
In case of a stronger labor market and high inflation the AUDUSD pair will strengthen.
The final recommendation is to buy AUDUSD if the actual employment and inflation data comes out above estimates. Profit or loss could be taken at the end of the current month.
This content is for informational purposes only and is not intended to be investing advice.
