Where Is the AUD Headed After the RBA Pauses?

The Reserve Bank of Australia (RBA) met in the early hours of the morning to determine the appropriate level of interest rates. Most economic calendars were showing a pause at 4.10% after the RBA delivered a surprise rate hike of 25 basis points (bps) in the last meeting in June. Although, market expectations suggested a 40% probability of a 25 bps rate hike by the RBA. But as we said, the general consensus among analysts is that rates will remain unchanged.

The recent decline in the monthly headline Consumer Price Index (CPI) from 6.8% to 5.6% has fallen below the lower end of the forecast range which is good for the Australian public. Additionally, the Core CPI, which excludes volatile food and energy prices, decreased to 6.1% from 6.7%.

This supports the notion that the RBA may exercise caution in its approach to rate hikes. If the RBA indicated that it has likely reached a peak interest rate, it could potentially lead to selling pressure on the Australian Dollar (AUD) which has been making a bullish reversal in the last three days. Although expectations were for a hawkish hold this time, with hints for another hike in the coming meetings.

RBA July Policy Meeting

• RBA leaves the cash rate unchanged at 4.10%
• Prior they raised rates by 25 bps to 4.10%
• Higher rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so
• In light of this and the uncertainty surrounding the economic outlook, the RBA decided to hold interest rates steady this month
• This will provide some time to assess the impact of rate hikes to date and economic outlook
• Inflation in Australia has passed its peak
• Growth in the Australian economy has slowed and conditions in the labour market have eased
• A significant source of uncertainty continues to be the outlook for household consumption
• Some further tightening of monetary policy may be required
• The decision to hold rates steady provides more time to assess the state of the economy
• Remains resolute in its determination to return inflation to target and will do what is necessary to achieve that
• Full statement

The balance of the decision was rather fine as market pricing was seeing roughly 63% odds of no change, and the RBA delivered on that. The statement reads as a pause or potentially just a “skip”, as they continue to maintain the recent forward guidance that “some further tightening may be required”.

Market players are still nonetheless anticipating another rate hike in August and from the communication, it doesn’t sound like the RBA is going to put that off the table for now. They are saying that this is a pause to reassess but we may hike rates again.

AUD/USD Live Chart