Inflation is too high to consider interest rate cuts

On By Pranco

Governor of the Reserve Bank of Australia (RBA). Michel Bullock said on Thursday that Australia’s core inflation is “too high” to consider rate cuts in the near term. Bullock reiterated that there is still a long way to go before prices sustainably return to target, according to Bloomberg.

Key quotes

Policy will have to remain restrictive until there is more confidence in inflation.

There is still some way to go to bring inflation back to the target range in a sustainable manner.

Our forecasts suggest that there will be a sustainable return to target by 2026.

The word ‘sustainable’ is important because it recognizes that we need to look beyond temporary factors that influence the headline inflation rate.

Given the tightness in the Australian labor market, together with our assessment that demand levels continue to exceed supply in the broader economy, we expect inflation to take slightly longer to settle on target.

If the data that we see and the information that we get from our contact and so on indicates that inflation is picking up again, inflation is not going to follow that trajectory, but is going to go in a different direction, then that would be a very big step. red flag for us.

Market response

At the time of writing, the AUD/USD pair is trading 0.02% lower on the day to trade at 0.6499.

Frequently Asked Questions about RBA

The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of directors at eleven meetings per year and, if necessary, at ad hoc emergency meetings. The RBA’s primary mandate is to maintain price stability, which means inflation of 2-3%, but also “…contribute to the stability of the currency, full employment and the economic prosperity and well-being of the Australian people. ” The main tool to achieve this is to increase or decrease interest rates. Relatively high interest rates will strengthen the Australian dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.

While inflation has traditionally always been seen as a negative factor for currencies because it lowers the value of money in general, in modern times the opposite has been the case with the relaxation of cross-border capital controls. Moderately higher inflation now tends to cause central banks to raise interest rates, which in turn tends to attract more capital inflows from global investors looking for a lucrative place to keep their money. This increases the demand for the local currency, which in the case of Australia is the Australian dollar.

Macroeconomic data measures the health of an economy and can affect the value of the currency. Investors prefer to invest their capital in economies that are safe and growing, rather than in precarious and shrinking economies. Greater capital inflows increase the aggregate demand for and value of the domestic currency. Classic indicators such as GDP, manufacturing and services PMIs, employment and consumer confidence surveys can influence the AUD. A strong economy may prompt the Reserve Bank of Australia to raise interest rates, which will also support the AUD.

Quantitative easing (QE) is a tool used in extreme situations where lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian dollars (AUD) for the purpose of purchasing assets – usually government or corporate bonds – from financial institutions, providing them with much-needed liquidity. QE generally results in a weaker AUD.

Quantitative tightening (QT) is the opposite of QE. It is undertaken after QE, when the economic recovery is underway and inflation starts to rise. While during QE the Reserve Bank of Australia (RBA) buys government and corporate bonds from financial institutions to provide them with liquidity, during QT the RBA stops buying more assets and stops reinvesting the principal maturing on the bonds that she already owns. It would be positive (or bullish) for the Australian dollar.