A 25 bps hike was expected and some investment banks had seen the case for a 40 bps rate hike. However, a 50 bps rate hike took markets by surprise and the AUD is quickly re-pricing the move and opens an AUDNZD upside bias. This happened while I was giving a BBC One news interview being asked on any the fallout from the no-confidence vote. So, what prompted the move? In a word, inflation. The RBA like many central banks around the world are struggling to keep on top of surging inflation. A string of central banks have been turning more hawkish recently as inflation pressure looms
The inflation factor influencing the RBA
The RBA lay the cause of inflation down to COVID related supply chain disruptions, the war in Ukraine, high energy prices, but also looked at domestic factors. Ironically the tightest labour market in 50 years, with record low unemployment down at 3.9%, is making inflationary pressures wors
The RBA is confident that the higher interest rates can be managed. Household and business balance sheets were generally seen to be in good shape and there was a general upswing in business noted. Household spending is a source of uncertainty to the RBA though they recognise that household saving rates remain high.
The China factor
One key uncertainty for the RBA is how COVID develops in relation to China. Sentiment has recently turned higher as Beijing and Shanghai come out of recent COVID curbs. However, with so much of Australia’s economy being linked to how China is doing this is a key factor on how aggressive Australia can be in hiking rates. See here for more details on the factors influencing China and its Covid policy.
The AUDNZD buy bias
This gives a clear AUDNZD buy bias with buyers reasonably expected on dips. The RBA is catching up with the RBNZ in terms of the speed of rate hikes. Should monetary policy fundamentally change for either the RBA or the RBNZ this would impact this outlook.