The market had primarily been swinging between moves of 25 and 40 basis points (bps), however, a few analysts had predicted a rise of 50 bps. Following the announcement, the AUD/USD rose from 0.7180 to over 0.7240 before retracing back below 0.7200. The ASX/S&P 200 index fell even more, down 1.7% as of press time. Following the news, the 3-year Commonwealth Australian Government bond rate rose 12 basis points to 3.28%.
“The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed,” said Philip Lowe, the Governor of RBA for the lax monetary policy post-covid.
This could imply that the bank is attempting to return policy to a neutral position, whatever that may be. The Reserve Bank of Australia (RBA) has more than enough ammo to justify additional rate increases. The most recent inflation estimate was well over their target of 2-3 % for headline CPI across the business cycle.
The other week, GDP for the first quarter came in at 0.8%, above predictions of 0.7% and a previous reading of 3.4%. This resulted in annual GDP of 3.3 percent in March, compared to 3.0 percent expected and 4.2% in February. There were also positive modifications to preceding quarters.
The April trade balance was AUD 10.5 billion, compared to AUD 9 billion expected and AUD 9.3 billion prior, according to more recent monthly figures. The unemployment rate is still at 3.9%, which is a historic low.
Building permits, on the other hand, fell by 2.4% month over month in April, rather than climbing 2.0% as projected. This was attributed to a massive flooding disaster that affected a big portion of the east coast Australia.
Other second-tier data revealed on Monday added to the case for substantial hikes. In May, the Melbourne Institute’s inflation gauge grew by 1.1% from the previous month, and ANZ job ads climbed by 0.4% from two months ago.
All of this points to additional RBA rate hikes, but CPI is the important missing element of information. A crucial component of economic data that is only released every three months rather than every month and July 27th will constitute the next CPI release. Even without that information, it is evident that emergency lax monetary policy is not required anymore, and a return to normalcy is imminent.
External pressures, on the other hand, will continue to influence the direction of the AUD/USD. Apart from Japan and China, central banks around the world are hiking interest rates.
Risk sentiment has been dissipating in response to a variety of causes. The supply chain impacts China’s measures, the commodity price rise as the Ukraine war drags on, and US Dollar contortions as the Fed begins its own restriction.