On Tuesday, the RBA Board meets and is widely expected to raise the cash rate. Once again, the main question will be how much.
RBA communique in mid-June brought a new hawkish element to the RBA’s monetary policy table, noting that”the current level of the cash rate is well below”the estimated neutral rate, thought to be “at least” 2.5%.
The neutral real interest rate is the real interest rate that is neither stimulatory nor contractionary.
While the actual neutral rate can’t be measured directly, in a speech on July 20, the RBA Governor said again the neutral rate was around 2.5% and explained the Boards thinking behind its 2.5% neutral rate.
“If we take the 2½percent midpoint of the inflation target as a reasonable estimate of medium-term inflation expectations, this suggests that the neutral nominal rate is at least 2½percent. It would be higher than this if medium-term inflation expectations were to shift higher.”
Based on the RBA’s forecasts for inflation to rise to around 7¾ percent and for the unemployment rate to decline further in the months ahead, the RBA needs to continue tightening interest rates past the neutral rate to fulfil its pledge that the “The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”
While the RBA noted at the August Board meeting that “The path to achieve this balance is a narrow one and clouded in uncertainty, not least because of global developments”, the RBA is likely to deliver a fourth consecutive 50bp rate hike next week, taking the cash rate to 2.35%.
This will be followed by a 25bp rate hike in October or November, taking the cash rate to 2.60% and into the mildly restrictive territory before year-end.
The RBA is then likely to pause to allow time to assess the impact of the fastest 250bp of rate hikes in RBA history on inflation, growth, and the labour market.
The AUDUSD has fallen almost 3.5% over the past week, hit by the perfect storm of a hawkish Fed Chair at Jackson hole, renewed lockdowns in China and weaker metals and energy prices. Easily running over AUDUSD dividend repatriation demand from the big Australian miners.
The break and close below support .6850 area, leaves the AUDUSD vulnerable to a retest of the July .6681 low and needing to reclaim .6900c to negate downside risks.
Source Tradingview. The figures stated are as of September 2nd ,2022. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
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