Heading into the latest RBA meeting it was reasonable to expect a more bullish decision as the Q4 2022 headline inflation data rose to 7.8% from 7.3%. This was a marked increase in inflationary pressures and would have got the RBA’s attention as inflation was stepping higher in Australia. This was the highest inflationary print since 1990.
The RBA referenced this print in its statement, but the RBA governor expressed confidence that inflation would peak. This chimed with the inflation report itself as it was largely within the holiday and leisure sector where the most inflation was found. This was a natural response to COVID lockdowns as pent-up demand was used in travel to see friends and family. See here for the details.
The 25 bps hike was as expected, but some thought this could be the last hike from the RBA. However, the RBA signalled further hikes to come: ‘The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary’. In STIR markets the terminal rate is now just under 4% for this summer with the level now at 3.35%, so the market expects more hikes from the RBA.
The way ahead for FX
The Board pointed out its concerns about a high labour market, high inflation, and some struggling households with higher interest rates. So, going forward it means labour data and inflation data are likely to provide short-term tradable opportunities in FX. If the inflation data comes in high that would support the AUD as traders speculate it will make the RBA more hawkish on its path of rates going forward. The vice versa should also hold with lower than expected inflation prints weakening the AUD on expectations that RBA will need to be less aggressive in hike rates.