Market update: Australian dollar whipsaws after RBA pause again on hiking cycle

RBA retains cash rate amid market uncertainty

The Australian dollar initially spiked before running lower after the Reserve Bank of Australia (RBA) once again refrained from tightening monetary policy, leaving the cash rate at 4.10%. Consequently, the S&P/ASX 200 bumped up on the news. Going into today’s decision, traders and commentators were divided on the potential outcome.

The futures interest rate market had priced in a less than 20% probability of a 25-basis point hike, while a Bloomberg survey of economists saw 18 in favour of a lift and 12 looking for no change.

Analysing the RBA's stance: Inflation and the unemployment rate

In the accompanying statement, Governor Lowe indicated, “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks.” Regarding inflation, they also noted that “Inflation in Australia is declining but is still too high at 6 per cent.”

The RBA’s preferred measure of trimmed-mean CPI was 5.9% year-on-year to the end of June which is also less than the 6.0% estimated and 6.6% previously. The bank believes that the unemployment rate will need to climb toward 4.5% in order for CPI to get back down below 3%.

New leadership and future prospects

Today’s decision comes after the appointment of Michelle Bullock as the new RBA Governor was announced just over two weeks ago. She will take up her new role in mid-September. Ms Bullock, a reputed economist, has been the Deputy Governor of the bank since April 2022 and has been with the institution since 1985. The appointment is mostly viewed as a steady transfer of leadership at a critical time for monetary policy at the RBA.

Moving forward, the bank has emphasized that incoming data will enable them to determine the impact of the increase of 400 basis points to borrowing costs since May last year. This could potentially lead to higher volatility around economic data than has been the recent case for Australian financial markets.

AUD/USD one minute chart price reaction to RBA hike

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