Reserve Bank of Australia Retains Ultra-Low Interest Rates as AUD Breaks Barriers

In its recently concluded policy meeting, the Reserve Bank of Australia (RBA) decided to leave its interest rates unchanged at 0.1%. The bank also mentioned the rising inflation and noted that the trend could continue in the mid-term as unemployment dropped to a worse-than-expected 4%.

RBA Governor Philip Lowe noted in the statement: “Over coming months, important additional evidence will be available to the Board on both inflation and the evolution of labor costs.” He added that “the Board will assess this and other incoming information, as its sets policy,” leaving out mentions of the Board being patient as he stated previously.

That said, the capital markets perceived the latest development as a sign of preparation for an eventual monetary policy tightening, which extended some bullish support to the Australian dollar (AUD). In the London session I’m Tuesday, the Aussie traded up by over 1% against the US dollar, Japanese yen, Euro, and the pound, printing record highs against other top currencies.

Lowe previously hinted at the possibility of a rate hike later in 2022, as markets bet on an earlier rate hike amid worsening inflation figures.

Investors Expect Reserve Bank of Australia to Increase Rates to 1.75% by Year-End, as Analysts Eye Core Inflation Spike

Consumer prices data will hit the market on April 27, with analysts projecting a core inflation jump of 1% or more in Q1 2022 to drive the annual inflation to 3.2%. A realization of this projection would make it the first time in 12 years that core inflation would top the RBA’s target rates between 2 – 3%, which should make it more difficult to justify lower interest rates.

Stephen Miller, an investment strategist at GSFM, noted: “The retirement of the ‘patience’ mantra is an acknowledgment that, like the rest of the developed country complex, inflation in Australia has and will surprise with its magnitude and momentum.” He added that “the RBA wishes to avoid meeting an inflation target by causing a recession, or allowing high and potentially destabilizing inflation to persist well into 2023.”

That said, investors have priced in a possible rate hike to 0.25% in June and expect six more rate hikes to 1.75% by the end of the year.