Reserve Bank of Australia (RBA) Governor Michele Bullock is speaking at the press conference, following the announcement of the December monetary policy decision on Tuesday.
Bullock is responding to questions from the media as part of a new reporting format for the central bank starting this year.
The RBA maintained the benchmark interest rate at 4.35% for the ninth straight meeting earlier this Tuesday but signalled a dovish pivot.
Key quotes
Need to think carefully on policy.
Recent data have been mixed with some softening.
Discussed upside inflation risks had eased but not gone away.
Need to see more progress on underlying inflation.
Some inflation pressures remain.
Some data has been a bit softer, but inflation elevated.
Level of demand is still too high.
Change in wording of statement is deliberate.
Board has noted that data has been softer.
Have little bit more confidence on inflation.
Board feels the economy is pretty much in line with forecasts.
Do not need two or more quarterly inflation prints for change.
Will be watching all data including employment.
Did not discuss interest rate cut.
Did not discuss raising rates either.
Cannot say when will be confident on inflation.
But board has taken notice of softer data.
Do not want to endorse market reaction, but not surprised by reaction.
Do not know if we will cut rates in February.
Will have to watch data, wages and demand are slowing.
If inflation does not decline, then we have another problem.
Market reaction
AUD/USD is holding losses near 0.6400 on the above comments, down 0.54% on the day, as of writing.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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