Australian dollar muted as RBA stands pat on interest rates

RBA decision keeps Australian interest rates steady, Aussie shrugs 

On Tuesday, the Australian dollar remained relatively stable following the Reserve Bank of Australia's (RBA) decision to leave interest rates unchanged.  

During the European trading session, the AUD/USD pair saw a slight increase of 0.17%, trading at 0.6494. 

The RBA kept its interest rate steady at 4.35% in its first meeting of 2024, continuing its cautious approach despite a quarter-point hike in November and ongoing inflation declines. The move was widely anticipated by investors, with the Australian dollar — also known as the “Aussie” in foreign exchange markets — saw a modest gain after the announcement, peaking at 0.6521 against the U.S. dollar, but then shedding its gains later in the day. 

In its statement, the RBA recognized the decrease in inflation but noted it was still above desired levels, indicating a prolonged period before inflation consistently falls within the 2-to-3% target range. The central bank's revised inflation forecast suggests a return to the target range by 2025, with a midpoint expected to be achieved in 2026. 

"While recent data indicate that inflation is easing, it remains high... The Board needs to be confident that inflation is moving sustainably towards the target range," said the RBA Board in a statement. 

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Australian inflation way above target as RBA opts to keep rates unchanged 

The RBA has ramped up Australian interest rates by 425 basis points since May 2022 in an effort to curb stubbornly high inflation. Although inflation dropped to a two-year low of 4.1% in the last quarter, down from the 2022 peak of 7.8%, it remains significantly above the desired target.  

The Australian economy has also experienced a marked slowdown, with the once vibrant labour market showing signs of easing and consumer spending continuing to be subdued due to cost of living challenges and elevated mortgage rates. 

The RBA Board also hinted at the possibility of further rate hikes if inflation trends upwards unexpectedly. The central bank expressed concerns about external factors like China's economic deceleration and geopolitical tensions in Ukraine and the Middle East, as well as domestic issues like the delayed impact of monetary policies and household spending. 

RBA Governor Bullock says bank will remain data-driven 

In a press conference, Governor Bullock stressed the RBA's commitment to curbing inflation as its top priority — meaning that Australian interest rates would remain elevated in the near future. She added that the bank’s board needed to be convinced that inflation was moving sustainably toward its target before considering a loosening of monetary policy: 

"We haven't ruled anything out and we haven't ruled anything in... The optionality here really needs to be maintained because we need to be driven by the data." 

RBA joins other central banks in holding off on rate cuts 

Gareth Aird, Head of Australian Economics at Commonwealth Bank, said he does not expect the RBA to act on its hiking bias, saying that a first rate cut would likely come in September: 

"It will take more than just weak economic growth for the RBA to entertain the idea of policy easing. The unemployment rate will likely need to rise a little more quickly than the RBA anticipates and inflation will need to fall a little faster, and we expect both of those outcomes to transpire." 

The RBA is joining a number of other central banks in holding off on premature rate cuts. The economic resilience of the U.S. and firm statements from the Federal Reserve recently led investors to push back expectations of the start of U.S. monetary easing from March to June. 

Luci Ellis, chief economist at Westpac and a former RBA official, told Reuters in a comment: 

"We doubt that the (RBA) Board are even thinking about rate cuts yet. We continue to expect the RBA to reach this level of comfort around September." 

Australian dollar forecast: SocGen says next potential support for AUD/USD at 0.6410 

As AUD/USD drifted below $0.65 after the RBA meeting, economists at Societe Generale updated their Australian dollar forecast: 

“AUD/USD rebound petered out near graphical hurdle of 0.6900 representing highs of last June/July. It has experienced a deeper pullback after this test. It is now attempting re-integration within previous multi-month base denoting lack of steady upward momentum.  

Reclaiming recent pivot peak at 0.6625 would be essential to confirm next leg of up move. Failure could mean risk of extended down move towards next potential support located at 0.6410, the 76.4% retracement from October and 0.6270”. 

The U.S. dollar index (DXY), which gauges the performance of the greenback against six major global currencies, held steady at around 104.49 (up 0.03% on the day) at the time of writing on Tuesday. DXY has gained over 3.10% this year so far. 

When considering foreign currency (forex) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. 

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.