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The RBA raises interest and targets inflation


MongiIG

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The Australian Central Bank has now raised interest rates by 2.75% over seven months and continues to signal further tightening with a focus on the labour market and domestic demand.

1667453991145.jpgSource: Bloomberg
 
Hebe Chen | Market Analyst, Melbourne | Publication date: Thursday 03 November 2022 

RBA's November meeting

As expected, the RBA decided to increase the cash rate target by 25 basis points to 2.85 percent. The Australian Central Bank has now raised interest rates by 2.75% over seven months and continues to signal further tightening with a focus on the labour market and domestic demand.

Furthermore, the RBA has revised its forecast for the inflation path from a previous forecast of 7.75% to 8%.

While the RBA is confident that inflation will decline next year due to “the ongoing resolution of global supply-side problems”, medium-term inflation expectations remain well above the Bank’s ideal zone. It is expected that inflation will sit around 4.75% in 2023 and a little above 3% in 2024.

What’s next for the RBA?

While the RBA has a mandated target of 2 to 3% on average, this further increase in inflation is poised to extend its tightening journey, potentially to the third quarter of 2023.

As shown in the future market’s yield curve chart, the market participants now expect the RBA will keep hiking rates to around 3.8% by next August. In the near term, the odds for December’s rate decision are primarily pointing to another 25 bps increase.

However, RBA governor Philip Lowe didn’t rule out the possibility of returning to a sizable hike, stating in a speech this week, "If we need to step up to larger increases again to secure the return of inflation to target, we will do that.”

1667453991070.JPGSource: ASX

AUD/USD

Thanks to the softer greenback, the AUD/USD has consolidated around the 64 cent level from the previous week.

The 23.6% Fibonacci retreatment is a major hurdle for the price to clear before touching on the 50-day MA (around 0.65). On the other hand, any retreat should find support from the 20-day SMA, now sitting at 0.6328.

AUD/USD daily chart

1667453991086.JPGSource: IG

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