The RBA’s minutes of the December meeting provided insight into the factors at play in the bank’s decisions on QE and rate hikes.
Australian inflation is more subdued than other countries and could settle to its ideal level next year.
There is little pressure on the RBA to change policy and they will feel little need to raise rates anytime soon.
Wednesday’s session calmed down after a few volatile sessions which saw Monday’s open crash lower on Omicron / lockdown fears, then recover in a very strong rally on Tuesday for risky assets. The FTSE is currently stable but sits just below last week’s high of 7306. US equity futures are slightly lower, but after Tuesday’s big gains they are still up on the week.
For the most part, currencies remain in consolidation patterns with the US dollar stuck off its 2021 high and appearing to want to break higher. EURUSD is stuck at annual lows and while Omicron fears have given the euro a slight boost (or more accurately, weighed more on other currencies than the euro), a side range has formed and created a bearish flag on the daily chart.
There has been a riskier tone in recent weeks due to Omicron, but risky currencies such as the Aussie haven’t performed too badly. Indeed, the AUDUSD hit a new annual low on December 3 and rebounded sharply by more than 3%, from 0.7 to 0.72. That was enough to break the losing streak in November which saw constant lows and highs. It’s even possible that a low is forming around the big number of 0.70, but we’re unlikely to see a sustained rise to confirm that view until the RBA makes a concerted hawkish turn, or alternatively, if the hawkish central banks turn around and come back dovish. This week’s release of the RBA’s minutes of the December meeting provided some insight into how and why the bank could possibly follow other banks into a hawkish stance, but did not look too far beyond the first. setp, February’s big decision on QE.
RBA weighing options
The RBA’s QE is still ongoing and has only been reduced slightly so far. Rate hikes are a distant prospect for 2023 or even 2024, but things could of course change. The market, rightly or wrongly, expects increases much sooner.
The December meeting did not provide any concrete signals, but it highlighted three factors at play that will influence the timing. According to Westpac, these are:
“… detailed analysis of the file for the QE decision in February; some overviews, including from the Bank’s liaison work, on the outlook for wage growth; and a comparison between Australia and other countries in terms of wages and inflation. “
The minutes highlighted some interesting observations on this last point. Australian inflation is well below other countries. Electricity and gas prices have increased much less and wage growth is also moderate. The RBA compares Australia’s trajectory to the euro rather than the US or UK.
“In economies where participation had been slow to recover and the number of pandemic cases had been high, such as the United States and the United Kingdom, nominal wage growth was at its fastest pace in years . However, like the Australian experience, nominal wage growth has remained subdued in the euro area and Canada. “
The RBA’s forecast for core inflation next year is 2.25%, which is close to the ideal level and would not need rate hikes to suppress. Anything above 2-3% would likely be unsustainable (or “transient”) unless backed by strong wage growth.
“The governor has repeatedly indicated that he would consider higher inflation to be unsustainable unless wage growth reaches 3%. Its ideal steady-state configuration would be 2.5% inflation; Wage growth of 4%, supported by productivity growth of 1.5%, ”emphasizes Westpac.
We can then assume that the bank would only be prompted for hawkish action by significantly higher numbers. At the moment, there is little pressure to act and the bank can focus on February and the first step: the slow withdrawal of QE. This is not likely to trigger a strong rally in the Aussie.