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

The hike was by 50bps as expected and the RBA repeated that it expects to take further action in the future. Inflation was put down to global factors (supply chain issues and energy price rises), but domestic factors were also recognised as being part of the problem. Inflation was recognised as being the highest it has been since the early 90s 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% in 2023, and 3% in 2024. Growth is expected to grow 3.25% in 2022, 1,75% in 2023 and 1.75% in 2024.

Household spending remains uncertain

In the previous meeting, the RBA raised a question about 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’.

Bottom line

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.

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