Reserve Bank of Australia (RBA) Governor Michele Bullock is speaking a press conference following the announcement of the July monetary policy decision on Tuesday.
Earlier this Tuesday, the RBA surprised markets by leaving the benchmark interest rate unchanged at 3.85%.
Key quotes
Already cut by 50 bps effects still to flow through.
By next meeting, will have more data and news.
Appropriate to have cautious gradual stance on easing.
This decision was about the CPI timing rather than direction.
Confident on a path to ease further.
Monthly CPI too volatile, quarterly could be higher.
There was active debate in board room, difference in two camps was not about direction.
Want to be sure we have nailed inflation.
Will not say how I voted.
We are on an easing path, question is timing.
This was a decision of the board, the rba cannot guide markets before hand.
People got too excited about mention of 50 bps in May meeting.
50 bps rate cut was considered in May.
But it was quickly dismissed..
We considered 50 bps just for the sake as an alternative.
But the firm decision was a 25 bps rate cut.
We’re not swinging around at all.
Can expect rates to decline if inflation slows as expected.
In monthly CPI, house building costs and durable goods were bit higher than expected.
Being cautious on policy has paid off for us.
Our forecast for Q2 trimmed mean is +0.6%, may be bit higher than that.
Policy decision will be based on our forecasts of future inflation.
Board thinks policy still little bit restrictive, but not sure.
Market reaction
AUD/USD is holds gains near 0.6540 on the above comments, adding 0.65% 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.
