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RBA's Hauser: Inflation outlook looks slightly above expectations and 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, Hauser said he remained uncertain about the board’s decisions.
Hauser outlines inflation and policy concerns
Forecasts are still being finalised; the board’s decision remains uncertain.
The outlook for inflation appears worse than forecast and marginally above expectations.
Cost pressures are companies’ foremost concern.
Inflation has stayed high for a prolonged period.
Expectations for inflation must remain anchored to the target.
Some softening has been observed in employment data and housing.
Despite effective monetary policy, the inflation outlook is worsening.
A response to supply shocks is necessary to maintain inflation expectations.
The quarterly trimmed mean is likely to come in above expectations.
Current inflation cannot be the policy objective, although it remains relevant.
Constraints on capacity are more acute than anticipated.
The September labour report came in somewhat below expectations.
Although unemployment is still low, the labour market is easing.
AUD/USD holds its gains
With a daily gain of 0.45%, AUD/USD remains on firmer ground around 0.7009 at the time of writing.
RBA explained
Responsibility for Australia’s monetary policy and interest rates rests with the Reserve Bank of Australia (RBA). A board of governors takes decisions at 11 meetings each year, with additional emergency meetings convened as needed. Maintaining price stability, defined as inflation of 2-3%, is the RBA’s primary mandate. Its remit also includes “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Changes to interest rates are its principal means of pursuing these objectives. Relatively high rates strengthen the Australian Dollar (AUD), while the reverse also applies. Quantitative easing and quantitative tightening are among the RBA’s other policy tools.
Traditionally, inflation was regarded as unfavourable for currencies because it erodes the value of money. In modern times, however, the easing of cross-border capital controls has reversed that relationship. Moderately higher inflation now tends to prompt central banks to raise interest rates. Those higher rates attract capital from international investors seeking an attractive return on their money, boosting demand for the domestic currency: in Australia’s case, the Aussie Dollar.
By indicating the health of an economy, macroeconomic figures can affect the value of its currency. Stable, expanding economies are generally preferred by investors to those that are vulnerable and contracting. As more capital flows in, overall demand for the domestic currency increases, lifting its value. Indicators that can move AUD 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 through the economy, Quantitative Easing (QE) can be deployed in extreme circumstances. Under QE, the Reserve Bank of Australia (RBA) creates Australian Dollars (AUD) to purchase assets from financial institutions, usually government or corporate bonds. These purchases supply the institutions with much-needed liquidity. The usual outcome is a weaker AUD.
As the opposite of QE, Quantitative tightening (QT) follows once an economic recovery is under way and inflation begins to rise. QE involves the Reserve Bank of Australia (RBA) buying government and corporate bonds from financial institutions to supply liquidity. Under QT, by contrast, the RBA ceases further asset purchases and no longer reinvests the principal repaid as bonds in its existing holdings mature. This would have a positive, or bullish, effect on the Australian Dollar.
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