RBA takes its time as inflation takes longer to tackle

Heading into the last RBA meeting, we discussed the potential for some AUDNZD downside on an RBA dovish surprise. However, it is not likely to last. The market was split 50/50 over whether the RBA would hike or not and at the event it paused rates at 4.10%. However, the major focus was always going to be surrounding the forward guidance that the RBA gave and how short-term interest rate markets would react. 

The implication of a pause

The RBA has paused rates but crucially has still signalled more rate hikes to come. The key to this meeting was always going to be on the future signalling of rates and not so much on the actual decision. So, looking at short-term interest rate markets we can actually see that rate expectations are virtually unchanged over a longer time frame. The terminal rate is now seen at 4.62% and that is only marginally higher than the 4.54% expected earlier.

The RBA considered that ‘the balance of risks on inflation (had shifted) to the upside compared with a month earlier’. However, they also think that inflation has ‘passed its peak’ and is forecast to return to the target range by mid-2025.

Taking its time

In the latest RBA statement, the board decided to pause on rates partly because inflation was seen as taking longer to return to target than expected. So, the RBA wanted to take a pause and see how the economic data develops in a bid to try and preserve gains in employment. Unemployment is historically low in Australia and the RBA doesn’t want to destroy the labour market unnecessarily. However, at the same time, it also recognised the risks of inflation becoming entrenched in higher wages.

What to watch from here

AUD traders should watch the following two releases very carefully: labour data and inflation data. If it surprises to the upside, especially inflation data, then expect the AUD to potentially gain against the NZD again on higher rate expectations to come from the RBA.

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