Find out about the Reserve Bank of Australia (RBA) meeting and statement – including how the bank sets the cash rate, why it’s important for traders and its effect on the Australian economy.
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Reserve Bank of Australia meeting
What is the RBA monetary policy meeting?
The RBA’s monetary policy meeting is a board meeting held 11 times a year on the first Tuesday of every month, except January. The RBA meets to discuss and set the ‘cash rate’ – Australia’s benchmark interest rate. The cash rate affects the cost of borrowing for banks, which influences the interest rates they charge to consumers and businesses. This, in turn, affects how these stakeholders borrow and spend money, which can ultimately lead to a change in inflation.
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How does the RBA meeting statement affect traders?
The RBA meeting statement affects traders because it sets the official interest rate in Australia – the cash rate. In turn, the cash rate affects the overall stability of the financial system, including borrowing costs, rates of return and currency values. That is why, when an RBA meeting takes place, the market can become slightly more volatile for a short period.
The cash rate is defined as the official interest rate at which banks borrow money from other banks on an overnight basis. However, it also influences rates set by commercial banks and other lenders, which affects spending and borrowing, and – eventually – inflation. This causes a ripple effect across the Australian economy, including the demand for bonds, stocks, currency and other securities. The meeting statement is important to traders because they can come up with their trading strategy and make decisions based on the most recent rate changes. Many traders keep informed about RBA meeting dates and statement releases to identify opportunities and minimise their trading risk.
Why are the RBA's interest rate decisions important to traders?
RBA interest rate decisions are important to traders because they can affect the value of various financial instruments. If the interest rate increases, it is likely to increase the value of the Australian dollar (AUD) but reduce the value of Australian stocks, bonds, indices and other securities. Lowering the interest rate or implementing quantitative easing is likely to have the opposite effect.
Traders should consider recent interest rate changes when deciding whether or not to open a position. They could try to make predictions about the interest rate ahead of the announcement to capitalise on short-term price fluctuations and boost profit.
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How does the RBA set the cash rate?
The RBA sets the cash rate with the aim of achieving ‘monetary stability’, which it defines as an inflation rate of 2-3% per annum. It must take many current economic factors into consideration to set the most appropriate cash rate.
If the RBA wants to lower inflation, it will increase the cash rate. If it wants to boost economic activity, it will lower the cash rate. Another important consideration is the fluctuation of the AUD exchange rate. If the AUD falls against other currencies, export prices will fall, which can lead to higher inflation and a lower cash rate. To support economic growth and activity, the RBA must keep inflation and, ultimately, the cash rate in a healthy band.
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