- The RBA cuts its official cash rate at 25 basic points, citing the decrease in inflationary risks and winds against global.
- The Australian dollar is under more pressure by the internal political division and the recent cuts of the PBOC’s rates of China.
- The Governor of the RBA, Michelle Bullock, points out a flexibility of monetary policy but minimizes the perspectives of a prolonged relaxation cycle.
The Australian dollar (Aud) drops to 0.6415 against the US dollar (USD) on Tuesday, trying to stabilize near the minimum of the previous day. Aussie was under renewed pressure after the Australian Reserve Bank (RBA) reduced its reference interest rate at 25 basic points, from 4.10% to 3.85%, the lowest level since 2023. This movement was widely anticipated by financial markets, with large banks such as Westpac and Commonwealth Bank of Australia (CBA) incorporating a quarter of a quarter point before the meeting.
The AUD/USD fell around 0.65% to 0.6408 after the decision, reversing the modest profits on Monday. Political instability added to the bearish tone after the National Party withdraw its support from the opposition coalition of Australia. In addition, the feeling around Aussie deteriorated after a new rate cut by the Popular Bank of China (PBOC), which fed growth concerns in Australia’s main trading partner.
The RBA pointed out in its policy statement that the upward risks for inflation have decreased, with recent data that show a continuous deceleration in price pressures. “Inflation has fallen substantially since the peak in 2022, since the highest interest rates have been working to bring aggregate demand and supply towards balance,” said Governor Michele Bullock.
Adopting a more measured tone compared to the last line position of February, Bullock acknowledged that the global context has changed for the worse, citing the announcement of tariffs of US President Donald Trump on April 2 and continuous uncertainty around the international perspective. Speaking with journalists after the decision, he said that the Board had considered both to maintain stable rates and a larger cut of 50 basic points, but finally opted for a cautious movement of 25 basic points.
“Does that mean that we head towards a long series of interest -rate cuts?
Even so, Aussie found some support from a US dollar in general. The US dollar index (DXY) extended its loss streak to operate near the 100.00 mark on Tuesday, since the USD bulls remain on the sidelines after Moody’s reduced the Credit qualification of the United States to AA1, citing the increase in debt levels and the increase in fiscal deficits. In addition, the growing concerns about the fiscal perspective of the USA after the approval by President Donald Trump of new tax cuts without compensatory expenditure reductions continue to press the dollar.
RBA FAQS
The Bank of the Australian Reserve (RBA) sets interest rates and manages Australia’s monetary policy. The decisions are made by a advice of governors in 11 meetings per year and in the necessary emergency meetings that are necessary. The main mandate of the RBA is to maintain price stability, which means an inflation rate of 2%-3%, but also “… contribute to the stability of currency, full employment and economic prosperity and the well-being of the Australian people.” Its main tool to achieve this is to raise or lower interest rates. Relatively high interest rates will strengthen the Australian dollar (AUD) and vice versa. Other RBA tools are the quantitative relaxation and hardening of monetary policy.
Although traditionally it has always been considered that inflation is a negative factor for currencies, since it reduces the value of money in general, the truth is that in modern times the opposite has happened with the relaxation of cross -border capital controls. Moderately high inflation now tends to take the central banks to raise their interest rates, which in turn has the effect of attracting more capital of world investors who are 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 calibrates the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in safe and growing economies than in precarious and contraction economies. A greater influx of capital increases aggregate demand and the value of the national currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment and surveys about consumer feeling can influence the AUD. A strong economy can encourage the Bank of the Australian Reserve to raise interest rates, also supporting the Aud.
The quantitative easing (QE) is a tool used in extreme situations in which to lower interest rates is not enough to restore credit flow in the economy. The QE is the process by which the Bank of the Australian Reserve (RBA) prints Australian dollars (AUD) in order to buy assets – normally State or business bonds – to financial institutions, thus providing them with the liquidity they need so much. The one usually translates into a weaker audience.
The quantitative hardening (QT) is the reverse of the QE. It is carried out after the QE, when economic recovery is underway and inflation begins to increase. While in the QE the Bank of the Australian Reserve (RBA) buys state and business bonds from financial institutions to provide liquidity, in QT the RBA stops buying more active and stops reinvesting the main one that expires of the bonds it already has. It would be positive (or bullish) for the Australian dollar.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
