- The Reserve Bank of Australia is set to cut the interest rate by 25 bps to 3.85% in May.
- Australian central bank Governor Michele Bullock’s comments and updated projections will hold the key.
- The RBA policy announcements would spike up volatility, rocking the Australian Dollar.
The Reserve Bank of Australia (RBA) is set to lower the Official Cash Rate (OCR) by 25 basis points (bps) to 3.85% from 4.1% after concluding its May monetary policy meeting on Tuesday. The decision will be announced at 04:30 GMT.
The updated economic forecast will be published alongside the policy statement, while RBA Governor Michele Bullock’s press conference will follow at 05:30 GMT.
With the rate reduction already priced in, traders will closely scrutinise the central bank’s updated economic projections and Governor Bullock’s comments for the next direction on interest rates and the Australian Dollar (AUD).
Focus on RBA’s next interest rate move
The recent series of Australian economic data releases have pushed back against markets’ pricing of more interest rate cuts by the RBA this year.
The Australian economy added 89K new jobs in April, beating estimates of a 20K addition by a wide margin, while March’s reading was revised to show the addition of 36.4K jobs instead of 32.2K previously reported. The Unemployment Rate remained unchanged at 4.1% in April.
Meanwhile, Australia’s first-quarter Consumer Price Index (CPI) rose 2.4% compared to the same period last year, coming in higher than the market expectations of a 2.2% increase, and unchanged from the 2.4% rise in the previous quarter.
Trimmed Mean CPI, the RBA’s closely-watched inflation gauge, rose 0.7% on a quarter-over-quarter (QoQ) and 2.9% on an annual basis. The RBA has an inflation target range of 2%-3%.
The Wage Price Index advanced 3.4% annually in the first quarter, exceeding the estimate and the prior reading of 3.2%. On a quarterly basis, wages increased by 0.9%, surpassing the 0.8% forecast.
The nation’s labor market remains strong while the underlying inflation is elevated, which could prompt the RBA to signal prudence on the policy outlook.
Besides, the revisions to the inflation and growth outlook will also help gauge the RBA’s path forward on interest rates.
Previewing the RBA policy decision, TD Securities (TDS) analysts said: “Overnight indexed swaps (OIS) markets have also fully priced in a 25 bps cut. Of interest will be the RBA’s assessment of the risks around tariffs. We see risks of minor downgrades to GDP, but doubt that CPI will shift materially.”
How will the Reserve Bank of Australia decision impact AUD/USD?
RBA Governor Michele Bullock is expected to caution about the economic and inflation outlook, particularly in light of the US tariffs. Therefore, she could reiterate, “have to be careful not to get ahead of ourselves on policy.” Bullock’s cautious remarks could revive the momentum of the AUD/USD recovery.
If Bullock raises concerns about the economic outlook while hinting at further rate cuts, the Aussie is likely to come under intense selling pressure, resuming its downside toward the 0.6300 level.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, highlights key technical indicators for trading AUD/USD following the policy announcement.
“AUD/USD remains confined in a range between the 200-day Simple Moving Average (SMA) and 50-day SMA heading into the RBA showdown. The 14-day Relative Strength Index (RSI) holds above the midline, currently near 53, keeping the bullish potential intact.”
“A dovish cut by the RBA could send AUD/USD lower toward the 50-day SMA of 0.6333, below which the 100-day SMA at 0.6299 could be tested. If the selling pressure intensifies, the 0.6250 psychological level will be the line in the sand for buyers. Conversely, buyers need acceptance above the 200-day SMA at 0.6452 to resume the recovery toward the November 25 high of 0.6550, followed by the 0.6600 threshold,” Dhwani adds.
Economic Indicator
RBA Press Conference
Following the Reserve Bank of Australia’s (RBA) economic policy decision, the Governor delivers a press conference explaining the monetary policy decision. The usual format is a roughly one-hour presser starting with prepared remarks and then opening to questions from the press. Hawkish comments tend to boost the Australian Dollar (AUD), while on the opposite, a dovish message tends to weaken it.
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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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