Following RBA decision: Australian central bank expected to raise interest rates as inflation pressures persist

• Interest rates will rise 25 basis points in Australia, from 4.10% to 4.35%, in November.
• Reserve Bank of Australia Governor Michele Bullock could maintain the hawkish tone.
• Volatility could increase around the Australian Dollar on the day of the Melbourne Cup.

The Reserve Bank of Australia (RBA) is expected to resume tightening its monetary policy when it meets on Tuesday, the day of the Melbourne Cup, having kept the benchmark interest rate stable for four consecutive meetings.

The Reserve Bank of Australia meeting will focus on whether Governor Michele Bullock maintains her recent hawkish speech, hinting at further interest rate hikes.

Reserve Bank of Australia to resume interest rate hikes

Current market positioning suggests a 25 basis point (bp) increase in the Reserve Bank of Australia’s official cash rate (OCR) will occur on Tuesday. The decision will be announced at 03:30 GMT, with the RBA expected to raise the interest rate from 4.10% to 4.35% after a four-month hiatus in the tightening cycle.

Australia’s big four banks, ANZ, CBA, Westpac and NAB, revised their RBA rate hike forecast, following a resurgence in inflation and hawkish comments from RBA policymakers.

Data from the Australian Bureau of Statistics (ABS) showed the Consumer Price Index (CPI) rose 1.2% in the third quarter, above market forecasts of 1.1% and above the 0.8% rise in the previous quarter. In September alone, the CPI rose 5.6% year-on-year, compared to 5.2% in August.

The core CPI, the trimmed average, rose 1.2% in the third quarter, beating estimates of 1.1%. Meanwhile, Australian retail sales rose for the first time in four quarters in the July-September period, with a rebound of 0.2% quarter-on-quarter versus a previous decline of 0.6%.

Despite signs of a cooling Australian labor market, strong consumer spending supports the case for the Reserve Bank of Australia to resume interest rate hikes. Commenting on the inflation data, Reserve Bank of Australia (RBA) Governor Michele Bullock stated that goods prices are falling, but services inflation remains persistent. “Service inflation is higher than we are comfortable with,” she said.

Bullock had mentioned last month that “the council [del RBA] will not hesitate to raise rates if there is a material upward revision to the inflation outlook.”

Christopher Kent, the RBA’s deputy governor for financial markets, had said at a Bloomberg event in early October that the board “may need to raise interest rates in the future to lower inflation. I think that reflects the fact that it doesn’t “We would like it to be much slower.”

Anticipating the RBA’s policy decision, BBH analysts said: “The Reserve Bank of Australia meets on Tuesday and is expected to raise rates 25bp to 4.35%. A handful of analysts surveyed by Bloomberg see rates stable. , while the World Interest Rate Probabilities (WIRP) suggest a 50% chance. These probabilities rise to 75% for December 5 and 100% for February 6, with a chance of a second hike nearby to 35% in the second quarter of 2024”.

How will the RBA’s interest rate decision affect AUD/USD?

Amid growing expectations of an interest rate hike, the Australian Dollar (AUD) is likely to see big moves following the RBA’s monetary policy announcement. Traders will closely scrutinize the RBA policy statement for its language, noting whether Governor Bullock is keeping the door open to further rate hikes.

Dhwani Mehta, FXStreet’s Chief Asian Session Analyst, outlines the key technicals for trading AUD/USD based on the outcome of monetary policy. “AUD/USD is at its highest level in three months, clinging to the 100-day SMA at 0.6511 ahead of Tuesday’s Reserve Bank of Australia meeting. The Relative Strength Index ( 14-day RSI has flattened but remains comfortably above the 50 level, keeping upside risks for the pair intact.”

“AUD/USD buyers need acceptance above the 100-day SMA at 0.6511 on daily close to initiate a significant recovery towards the bearish sloping 200-day SMA at 0.6618. The next bullish barrier lies at the psychological level of 0.6650. On the downside, static support lies at 0.6450, below which a test of Friday’s low at 0.6419 cannot be ruled out. Further down, the 50-day SMA at 0.6395 could come into play.