- The Board did not consider an interest rate cut during the December meeting, deciding the current stance appropriate.
- US moves against China could affect Aussie trade terms with China, potentially impacting the Aussie economy.
- Underlying inflation is still too high, but some of the data on the real economy is slightly softer, suggesting inflation will come down.
- If inflation continues to soften, the RBA could become confident about cutting interest rates.
- RBA will look at the data ahead of the February meeting, including monthly inflation and labor market data.
- Protectionism and trade tensions are focal points following Trump’s election win.
- War can cause supply shocks that may fuel inflation. Will remain focused on domestic inflation but will react to shocks at the time.
- February’s monetary policy decision will be data-driven.
- Things are moving in line with our forecasts, then at some point, we will be convinced inflation is coming within the band and will cut rates.
- However, if inflation doesn’t fall in line with projections, then we have a problem.
RBA Rate Statement Boosts Market Expectations for Rate Cuts
Earlier in the Tuesday session, the RBA left the Cash Rate unchanged at 4.35%. However, the Rate Statement signaled a potential shift toward a sooner-than-expected rate cut.
Salient points from the RBA Rate Statement included,
- Growing confidence that inflationary pressures are easing in line with forecasts.
- Softer-than-expected economic activity data from November.
- Declines in some cyclical labor market indicators and easing wage pressures.
- Reduced upside risks to inflation, although underlying inflation remains high.
- Momentum in underlying inflation indicates progress, but further improvement is needed to meet the target sustainably.
- The Board is gaining confidence that inflation is moving sustainably towards target.
Expert Views on the RBA Rate Path
AMP Head of Investment Strategy and Chief Economist Oliver Shane remarked on the RBA interest rate decision and rate path, saying,
“The market’s probability of a Feb cut has now risen to 65% with now 2 cuts priced in by May.”
Rising bets on two rate cuts could further impact demand for the Aussie dollar, potentially dragging the AUD/USD toward $0.63000.
AUD/USD Volatility Amid RBA Signals
Before the RBA press conference, the AUD/USD rose to a high of $0.64422 before falling to a low of $0.63786.
