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RBA's Hauser: Inflation outlook slightly above expectations, appears worse than forecast
The inflation outlook appears worse than forecast and slightly above expectations, Reserve Bank of Australia (RBA) Deputy Governor Andrew Hauser said on Wednesday. With forecasts still being finalised, he remained uncertain about the board’s decisions.
Hauser’s Key Remarks
Still finalising forecasts, uncertain about board decision.
Inflation outlook appears worse than forecast, slightly above expectations.
Companies cite cost pressures as top concern.
Inflation has remained elevated for an extended period.
Inflation expectations must stay anchored to target.
Observed some easing in job data and housing.
Monetary policy effective, but inflation outlook deteriorates.
Must respond to supply shocks to maintain inflation expectations.
Quarterly trimmed mean likely to exceed expectations.
You can't aim for current inflation, but it still matters.
Capacity constraints more intense than anticipated.
September labour report was somewhat weaker than expected.
Unemployment remains low, but labour market is softening.
0.45% Daily Gain for AUD/USD
As of this report, AUD/USD is trading near 0.7009, retaining its gains with a 0.45% rise on the day.
RBA: Essential Questions
Australia’s interest rates and monetary policy are determined by the Reserve Bank of Australia (RBA). Its board of governors makes decisions at 11 scheduled meetings each year, with emergency meetings convened when needed. Price stability is the RBA’s primary mandate, defined as inflation of 2-3%. Its remit also includes “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Interest rate increases and cuts are its principal policy instruments. Higher rates relative to those elsewhere strengthen the Australian Dollar (AUD), while lower rates have the opposite effect. Quantitative easing and quantitative tightening are also part of the RBA’s toolkit.
The easing of cross-border capital controls has reversed the traditional relationship between inflation and currencies. Inflation was historically regarded as negative for a currency because it erodes the value of money. Today, moderately higher inflation tends to prompt central banks to raise interest rates. Those higher rates attract capital from global investors seeking attractive returns, boosting demand for the domestic currency. In Australia, that currency is the Australian Dollar.
By indicating the health of an economy, macroeconomic releases can affect its currency’s value. Investors favour stable, expanding economies over fragile, contracting ones. Larger capital inflows lift overall demand for the domestic currency and increase its value. For AUD, influential indicators include GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys. Economic strength may also prompt the Reserve Bank of Australia to raise interest rates, providing further support for AUD.
When interest rate cuts alone cannot restore credit flows, central banks can resort to Quantitative Easing (QE), a measure reserved for extreme conditions. Under QE, the Reserve Bank of Australia (RBA) creates Australian Dollars (AUD) to purchase assets from financial institutions, typically government or corporate bonds. These purchases supply the institutions with much-needed liquidity. The usual outcome is a weaker AUD.
Once an economic recovery is under way and inflation begins to rise following QE, central banks can implement its reverse: Quantitative tightening (QT). During QE, the Reserve Bank of Australia (RBA) supplies liquidity by buying government and corporate bonds from financial institutions. Under QT, it ceases further asset purchases and no longer reinvests the principal repaid as bonds in its existing portfolio mature. This would support the Australian Dollar, making it a bullish development for the currency.
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