Morning Brief – Aussie recovers somewhat

Early this morning the Australian dollar moved into recovery mode against a basket of currency, and especially the US dollar, after the RBA hiked rates less than expected.

The Australian central bank, namely the Reserve Bank of Australia, raised the cash rate by 25bps to 3.35% at its February meeting, matching market forecasts.

Today’s move was the ninth rate rise since May last year, taking borrowing costs to a level not seen since April 2012 and bringing a total of 325bps increases, the sharpest annual tightening since 1989.

While dropping the previous guidance that it was not on a pre-set path, the board reiterated further hikes would be needed as inflation in Australia remains too high.

The Aussie basically rallied because the RBA said “The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

These words provide subtle changes in the wording but they have a strong impact considering that they are supposedly near the end phase of the tightening cycle.

The central bank is seeking to return inflation to the 2–3% range, expecting the reading to come in at 4-3/4% this year and at around 3% by mid-2025.

Reserve Bank of Australia policymakers mentioned they will keep the economy on an even keel, noting that the path to achieving a soft landing remains a narrow one.

The committee forecast Australia’s GDP growth to average around 1-1/2% in 2023 and 2024 after growing robustly in 2022. The RBA also increased the interest rate on Exchange Settlement balances by 25bps to 3.25%.

Accordingly, the statement from Reserve Bank of Australia Governor Lowe sounded a hawkish note, stating clearly the Board expects further rate hike increases are to come.

Notably, CPI is still way above that and in today’s statement the Bank said it did not expect the CPI to fall to even 3% until 2025. This should explain their position that multiple rate hikes are yet to come.