The Reserve Bank of Australia (RBA) published the Minutes of its May monetary policy meeting on Tuesday, highlighting that the board decided the case for a 25 basis points (bps) cut was a stronger one and preferred policy to be cautious and predictable.
Additional takeaways
The board considered keeping rates unchanged, cutting by 25 bps or 50 bps.
Decided case for a 25 bps cut was a stronger one, preferred policy to be cautious and predictable.
Inflation still not at mid-point of target band, labour market still tight.
Board agreed developments in domestic economy alone warranted a rate cut.
Progress on inflation meant policy did not need to be as restrictive.
Some downside risk that domestic household consumption might not pick up.
Larger move might offer more insurance against adverse global scenarios.
US trade policy was a significant and adverse development for global outlook.
Board not persuaded that 50 bps was needed, US tariffs had not yet affected Australian economy.
Would be challenging for business, households if aggressive easing had to be reversed.
Board judged not yet time to move monetary policy to an expansionary setting.
Expansionary policy might be needed if worst of global trade scenarios eventuated.
Policy well placed to respond decisively if international devlopments warranted it.
Market reaction to the RBA Meeting Minutes
At the time of writing, AUD/USD is trading 0.19% lower on the day to trade at 0.6483.
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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