Going into the RBA meeting no interest rate change was expected. However, the RBA surprised with a 25 bps hike raising interest rates to 3.85% in a surprise move sending the AUD sharply higher.
Stickier inflation and a tight labour market keep pressure on the RBA
Although the RBA sees inflation in Australia passing its peak, it remains high at 7% and it still sees that it will take some time to reach the target range (2%). The RBA’s central forecast suggests that it will take a couple of years for inflation to return to the top of the target range. This week’s rate hike was about the Board affirming its commitment to returning inflation to its target range and that it is willing to take the necessary steps to achieve that goal.
The outlook for household consumption remains uncertain and is a significant source of concern for the Board. GDP is expected to rise by 1.25% this year and approximately 2% by mid-2025. Inflation is predicted to be 4.5% in 2023 and 3% by mid-2025. The unemployment rate is expected to gradually increase to around 4.5% by mid-2025. The Board is aware of the risk that expectations of persistently high inflation may lead to larger price and wage increases, and recognises that further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe.
Watch the AUDNZD into the RBNZ meeting
On May 24, the RBNZ meets and it is expected to hike interest rates with short-term interest rate markets seeing an 84% chance of 25bps. So, traders should watch out if expectations for RBNZ rate hikes start falling. If a divergence opens up between the RBA and the RBNZ this can create some clear directional bias in the AUDNZD pair. Take a look at the bond yield spread between the AU10Y and NZ10Y to get a sense of where interest rate expectations will move the pair. Notice how the bond yield spread (blue line) tracks price. See the chart below. You can read the full RBNZ statement here.