The Federal Reserve is like the pied piper of central banks. When the Fed takes a change in policy the implications trickle down to other central banks around the world. So, it is not a huge surprise that the RBA has now switched to a meeting by meeting basis in a copy of the Fed’s move in July. The key phrase was that the RBA is ‘not on a pre-set path’. This sent the AUD lower immediately after the meeting as it is the RBA’s way of trying to balance tackling surging inflation, but in a way that can respond to slowing growth. Whether that is a policy mistake or not is for another time.
The decision to not be on a pre-set path
The hike was by 50bps as expected and the RBA repeated that they expect to take further action in the future. Inflation was put down to global factors (supply chain issues and the energy price rises), but domestic factors were also recognised. Inflation was recognised as being the highest it has been since the early 90’s at 6.1% y/y to the June quarter. Strong demand, a tight labour market, and capacity constraints were all cited as playing a role.
Inflation and growth forecast
Inflation is forecasted to rise to 7.75% in 2022, 4% over 2023, and 3% over 2024. Growth is expected to grow 3.25% in 2022, 1,75% in 2023 and 1.75% in 2024. There is no major takeaway here aside from the fact that the RBA see inflation slowing into next year. Whether that happens or not will be key to the pace of interest rates.
Household spending remains uncertain
In the previous meeting the RBA raised a question over how households would be able to manage the different factors of rising interest rates and higher prices. This concern was repeated with the RBA stating that ‘ Higher inflation and higher interest rates are putting pressure on household budgets’.
This was a dovish meeting and it would be reasonable to expect sellers from a retest of the AUDNZD resistance marked. However, this outlook will also depend on NZD data and monetary policy and it is a lower conviction.