RBA's Kent: Cash rate hikes are achieving their intended impact

Lallalit Srijandorn FXStreet

Reserve Bank of Australia (RBA) Assistant Governor Chris Kent said on Thursday that interest rate hikes are producing the expected effect. Kent added that further rate increases possible if risks emerge.

Key quotes

Cash rate hikes are achieving their intended impact.

Elevated exchange rate aids in curbing inflation by reducing domestic import prices.

Cash rate near top of range of central estimates of neutral rate from various models.

Neutral rate estimates have significant uncertainty.

Conditions in housing market have softened noticeably in recent months.

Tax changes in federal budget likely curbed demand in established housing market.

Significant investment in data centres and AI infrastructure supports aggregate demand growth.

Board will carefully weigh broad factors influencing financial conditions.

Governor Bullock highlights uncertainty and upside risks on inflation.

Productivity has been very disappointing, makes inflation challenge tougher

Further rate increases possible if risks emerge.

Valuations in certain equity markets appear quite high.

No urgent need to shift reserves into other currencies.

Need history on trimmed mean inflation to focus on monthly CPI report instead of quarterly.

Trimmed mean data needed for a few years, maybe three years.

Board aware a few factors must align for inflation to fall.

Market reaction

At press time, the AUD/USD pair trades 0.03% higher at around 0.7064.

RBA FAQs

What is the Reserve Bank of Australia and how does it influence the Australian Dollar?

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.

How does inflation data impact the value of the Australian Dollar?

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.

How does economic data influence the value of the Australian 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.

What is Quantitative Easing (QE) and how does it affect the Australian Dollar?

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.

What is Quantitative tightening (QT) and how does it affect the Australian Dollar?

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

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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