RBA Missed Market Expectations With Their Interest Rate Decision
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Summary:
- AUD declines in the wake of the RBA interest rate decision.
- 25bps interest rate hike from the RBA.
- AUD weaker.
RBA 25bps interest rate decision
The Australian Dollar fell when the Reserve Bank of Australia (RBA) announced a 25 basis point increase in interest rates, indicating that the peak in Australian interest rates was approaching. Markets anticipated another 50bp increase, but the action caught them off guard. The RBA stated in a statement that additional interest rate hikes were still necessary to reduce inflation, although economists now believe only one more increase is now expected.
The 'dovish' outcome resulted in a weaker Australian Dollar relative to the bulk of G10 currencies. The Pound to Australian Dollar rose by a third of a percent to 1.7480, its highest level since early August.
"AUD is a significant underperformer after the RBA hiked 25bp against a consensus for a 50bp move," says Adam Cole, Chief Currency Strategist at RBC Capital Markets.
Effect of interest rate hiking on the AUD
The cash rate has now increased six times in a row by the RBA, reaching 2.60%, which Governor Philip Lowe described as a "substantial" rate of tightening. The Australian Dollar may no longer receive rate support as a result of the RBA's rate hike cycle, but one expert claims that the prognosis for the currency is actually positive.
According to ANZ, in order to guarantee that inflation does reach its goal level, the cash rate will need to increase to obviously restrictive territory above 3%. "The slower pace of rate hikes now points to the tightening cycle extending into 2023," says Plank.
Plank observes that the 25bp decision and overall tone of the statement have significantly reduced market expectations for future interest rate increases. In the wake of the decision, three-year ACGB futures are trading at an implied yield of 3.3%, which is over 40 bps lower than Monday's closing.
Sources: investing.com, poundsterlinglive.com
