AUDUSD is moving in an Ascending channel and the market has reached the higher low area of the channel.
The Reserve Bank of Australia (RBA) has paused its rate hiking cycle, following the release of a softer-than-expected monthly CPI indicator for February.
The decision was made at the RBA’s April board meeting, with Governor Philip Lowe stating that the monthly CPI indicator suggests inflation has peaked in Australia. The February CPI rose by 6.8%, below forecasts for a 7.1% rise and well below the 8.4% peak of December 2022.
March Quarter CPI and Tightening Bias
The release of the RBA board meeting minutes for the April meeting confirmed that the RBA’s decision to pause its rate hiking cycle was a close call and that it retains a tightening bias. The release of the March quarter CPI is expected to confirm that while inflation peaked late last year, inflation remains elevated and well above the RBA’s target band of 2-3%.
EURAUD is moving in an Ascending channel and the market has reached the higher high area of the channel.
If core inflation prints at or below the expectations outlined above, the RBA is likely to keep rates on hold for another month to continue assessing the impact of its rate rises since last May. However, if Q1 2023 core inflation is higher than expected, the RBA may act on its tightening bias and hike the cash rate again as soon as next month.
Disinflation in Australia
The monthly CPI indicator suggests that goods disinflation is occurring in Australia, as it is elsewhere. Services inflation is expected to be a key driver of the increase in prices. Other timely measures of price pressures, such as the PMIs and the NAB business survey, also point to a softening inflation impulse.
GBPAUD is moving in an Ascending channel and the market has reached the lower high area of the channel
Negative real household disposable income growth and negative wealth effects are weighing on consumer demand as the impact of the RBA’s 350 bps of hikes is flowing through the economy. It is expected that the March quarter CPI will confirm that annual inflation peaked in the December quarter last year.
The RBA’s implied quarterly profile for Q1 23 is 1.6%/qtr for headline CPI and 1.4%/qtr for the trimmed mean. As such, headline inflation is forecasted to be lower than the RBA’s forecast, but core inflation is expected to print in line with the RBA’s expectations.
Monetary Policy Perspective
The core number is more important from a monetary policy perspective. The RBA has a hiking bias, and the RBA April Board Minutes noted that “the forecasts produced by the staff in February had inflation returning to the target range only by mid-2025, and that it would be inconsistent with the Board’s mandate for it to tolerate a slower return to target.
AUDCAD is moving in the Descending channel and the market has fallen from the lower high area of the channel
These forecasts were conditioned on monetary policy being tightened a little further.If Q1 23 underlying inflation is in line with the RBA’s forecasts, a 25bp rate hike at the May Board meeting is more likely than not, particularly given the labour market remains very tight. A core print slightly stronger than the RBA’s implied profile will leave us with reasonably high conviction that the RBA will hike the cash rate in May. A trimmed mean outcome of more than 1.6%/qtr would almost guarantee a rate increase at the May Board meeting.
In conclusion, the RBA has paused its rate hiking cycle following the release of a softer-than-expected monthly CPI indicator for February. The March quarter CPI is expected to confirm that while inflation peaked late last year, inflation remains elevated and well above the RBA’s target band of 2-3%. The RBA retains a tightening bias, and a rate hike in May is possible if Q1 23 underlying inflation is in line with the RBA’s forecasts.
AUDJPY is moving in the Descending channel and the market has fallen from the lower high area of the channel.
Negative real household disposable income growth and negative wealth effects are weighing on consumer demand, and the impact of the RBA’s rate rises is flowing through the economy. However, services inflation is expected to be a key driver of the increase in prices, and other timely measures of price pressures suggest a softening inflation impulse.
It is important to note that the RBA’s mandate is to maintain price stability and to promote full employment. While inflation is a concern, the RBA must also balance the impact of rate hikes on the broader economy and the labour market.
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