RBA’s Causiously Handling Inflation, Growth, AUD

The Reserve Bank of Australia is at a turning point in history, and both the financial markets and people will be impacted by its looming action. The stakes are high as RBA Governor Michele Bullock gets ready to reveal the monetary policy. Let’s attempt to examine the main elements at work:

Inflation Surge, Wage Growth

Inflation-linked worries are a main theme in 2024. Investors as well as politicians were alerted to the 3.5% YoY increase in the Monthly Consumer Price Index in March. That being said, the underlying dynamics are more important than the headline statistic.

The Reserve Bank of Australia (RBA) will announce its decision on monetary policy early on Tuesday. Australian policymakers are widely anticipated to keep the Official Cash Rate (OCR) unchanged at 4.35%. In the March meeting, the RBA moved away from the tightening bias, scrapping references to potential rate hikes from the Board’s statement. As a result, the Australian Dollar (AUD) plummeted.

Fuel to the fire is provided by consistent salary growth, which in Q4 2023 clocked in at 4.2% YoY. The RBA has to exercise caution because if it is too dovish, inflation may get out of control; if it is too hawkish, it could show growth.

Hawkish Whisper

Market participants bend over, anticipating the RBA’s next move. Many are wondering if moving ahead the RBA would adopt a more hawkish stance. When other central banks think about cutting interest rates, Australia remains the exception. It seems like there is a chance to take action in November 2024. Nevertheless, people will remember what Governor Bullock said. Will she sound cautious going forward, or will she gradually stiffen her lips?

Bullock’s Dilemma

In her statement from March, Governor Bullock kept her cards close to her vest. She did not exclude anything in or out, giving herself flexibility. It is still necessary to be confident that inflation will move towards the 2%–3% target range. The foundation of central banking, macroeconomic statistics, has to support the loosening argument. The credibility of the RBA is at risk.

CPI Puzzle

A 1.0% increase in the CPI was reported in Q1 2024 by the ABS. The quarterly increase (4.1%) was outpaced by the annual increase (3.6%). Despite the fact that the trimmed mean annual inflation continues to persistently exceed the RBA’s target, this is the seventh consecutive quarter of reduced annual inflation. It begs the question: Is this a passing phase or a structural change?

Employment Data, Rate Expectations

An RBA rate cut won’t be prompted by recent employment figures. Full-time employment increased in spite of a 6.6k decline in headline employment, which is good. Though nothing has been priced in yet, speculative interest is leaning towards rate increases. With their fingertips hovering over the “buy” or “sell” buttons, investors wait for cues.

New Economic Projections

It’s foggy in the RBA’s crystal ball. By the end of 2024, the adjusted mean inflation rate was predicted to drop to 3.1%. GDP growth, meanwhile, takes a brief pause, falling to 1.3% in Q2 2024 before progressively increasing. Governor Bullock, however, has to reevaluate in light of the higher-than-expected inflation. Does she plan to edit the script?

AUD/USD and Market Impact

A less hawkish Fed helps the AUD/USD pair dance above 0.6600. The pair’s rise might be extended by a hawkish RBA, moving it towards 0.6700 and higher. But watch out for the disgruntled investors. Should the comments hold true, AUD/USD might pull back around 0.6560, with 0.6500 acting as a last line of protection.

Governor Bullock is in the spotlight as the RBA takes centre stage. The financial world is holding its breath as they anticipate the high-wire decision. That fierce kangaroo, the AUD, is waiting to see what happens.