RBA’s Bullock: Forecasts imply cash rates might need to be lower for price stability
Reserve Bank of Australia (RBA) Governor Michele Bullock is addressing a press conference following the announcement of the August monetary policy decision on Tuesday.
Earlier this Tuesday, the RBA cut the benchmark interest rate by 25 basis points (bps) to 3.6%, as widely expected.
Key quotes
Forecasts imply cash rates might need to be lower for price stability.
There was no discussion of larger rate cut.
Neutral rate is a long run concept but only in the absence of shocks.
Dont put a lot of emphasis on neutral rate.
Board will take things meeting by meeting.
We do not target asset prices.
No promises on what the RBA will deliver on rates if financial markets face volatility bout.
Risks of volatility in markets if things go pear shaped in United States.
Have been watching house prices.
Recovery in housing has been gradual so far.
Our forecasts are dependent on more rate cuts.
Forecasts are conditioned on a couple more cuts, so would miss targets.
Would not rule out back to back rate cuts.
Will assess rates at every meeting.
If US Federal Reserve were to lower rates too quickly, that would have global implications.
Floating exchange rates allows us to set policy for our own needs.
Policy is forward looking, assumes we can continue to lower rates.
Market reaction
AUD/USD is holding lower ground near 0.6500 on the above comments, losing 0.15% on the day, as of writing.
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.
Author
Dhwani Mehta
FXStreet
Residing in Mumbai (India), Dhwani is a Senior Analyst and Manager of the Asian session at FXStreet. She has over 10 years of experience in analyzing and covering the global financial markets, with specialization in Forex and commodities markets.
