The Australian dollar has moved marginally higher against the US dollar after the Australian central bank hiked interest rates as widely expected by most market participants.
This morning the Reserve Bank of Australia raised the cash rate by 25bps to 3.1% at its final meeting of 2022, matching market forecasts. The move marked the eighth straight rate hike, taking borrowing costs to a level not seen since November 2012, with the board flagging more rate hikes ahead as inflation in Australia is too high.
The widely anticipated decision takes the central bank’s cumulative hikes since May to 3 percentage points, the sharpest annual tightening since 1989. The committee reiterated the policy rate was not on a pre-set course, as the size and timing of future rate increases will continue to be determined by the incoming data.
The board added inflation in Australia would peak around 8% this year before easing in 2023 and reaching a little above 3% in 2024. Policymakers reaffirmed their commitment to bring inflation to target levels and will do what is necessary to achieve that. The RBA also increased the interest rate on Exchange Settlement balances by 25bps to 3.0%
The RBA decision added that “Inflation in Australia is too high, at 6.9 per cent over the year to October. Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role. Returning inflation to target requires a more sustainable balance between demand and supply.”
Moreover, Governor Lowe said that “A further increase in inflation is expected over the months ahead, with inflation forecast to peak at around 8 per cent over the year to the December quarter. Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand.”
And “Medium-term inflation expectations remain well anchored, and it is important that this remains the case. The Bank’s central forecast is for CPI inflation to decline over the next couple of years to be a little above 3 per cent over 2024.”
Elsewhere, risk-on sentiment is improving as China is set to announce a further easing of COVID curbs as early as Wednesday. a new set of nationwide rules is due to be announced soon.
Beijing is also weighing whether to scale down its management of the virus to reflect the less serious threat it poses as early as January.
