Speaking at the Anika Foundation Fundraising Lunch in Sydney on Tuesday, Reserve Bank of Australia (RBA) Governor Michele Bullock said that the “key question is whether tightening already delivered is enough to slow inflation.”
Additional quotes
Board ready to raise cash rate further if needed.
Policy operates with a lag, so full effects of this year’s rate increases yet to be felt.
Best contribution policy can make is to maintain low, stable inflation.
Some further easing in growth of demand likely to be required to bring inflation down.
Some further easing in the labor market will likely be required.
Economy overall has adjusted gradually and broadly as expected.
Policy can’t address the economy’s slow productivity growth.
Underlying inflation has evolved as expected, but still too high.
Hearing from business that non-labour cost pressures continue to pick up.
Housing market has eased by more than we had anticipated.
Demand growth appears to be moderating broadly as expected in May baseline forecasts.
Remains too early to assess the full economic effects of the oil shock.
Market reaction
The Australian Dollar (AUD) sees little reaction to RBA Governor Bullock’s comments, with AUD/USD trading listlessly below 0.7000, as of writing.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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