- The Reserve Bank of Australia is expected to keep rates on hold in March.
- RBA Governor Michele Bullock’s comments could trigger some market reactions.
- The Australian Dollar is weak ahead of the announcement amid ruling risk aversion.
The Reserve Bank of Australia (RBA) is having its monetary policy meeting and will announce its decision early on Tuesday. The RBA is expected to keep the Official Cash Rate (OCR) steady at 4.10% following the interest cut delivered in February.
Back then, the central bank announced a 25 basis points (bps) trim, the first one since late in 2020. The new decision will be announced at 03:30 GMT, and Governor Michele Bullock’s press conference will follow at 04:30 GMT.
RBA to hold, eyes on Governor Bullock’s clue on interest rate
The RBA had maintained the OCR at multi-year highs for longer than any other central bank, however, tepid economic growth took its toll on policymakers, which finally delivered in February.
“The Board’s assessment is that monetary policy has been restrictive and will remain so after this reduction in the cash rate. Some of the upside risks to inflation appear to have eased and there are signs that disinflation might be occurring a little more quickly than earlier expected. There are nevertheless risks on both sides,” the February statement reads.
Even further, policymakers added: “The forecasts published today suggest that, if monetary policy is eased too much too soon, disinflation could stall, and inflation would settle above the midpoint of the target range. In removing a little of the policy restrictiveness in its decision today, the board acknowledges that progress has been made but is cautious about the outlook.”
Subtly, officials suggested they would have a cautious approach to interest rate cuts. With that in mind, market players anticipated no movements in March, moreover considering the Q1 Gross Domestic Product (GDP) will not be released until the end of April. Policymakers will likely wait for the growth update and additional inflation data before deciding on the next movement.
It is worth remembering that the Australian economy grew 1.3% in the final quarter of 2024, slightly better than the 1.2% anticipated by market participants. Exports supported broad-based growth, which, anyway, was considered “modest” by the Australian Bureau of Statistics (ABS).
Meanwhile, headline inflation dropped to a three-year low of 2.4% in the three months to December, according to Consumer Price Index (CPI) data, while underlying inflation shrank to a three-year low of 3.2%. The figures made it easy for the RBA to deliver a rate cut. Still, the next quarterly inflation report will be out in roughly a month, giving RBA policymakers another reason to delay modifying rates until May.
With no changes expected in the OCR, the focus will be on Governor Michele Bullock’s words and any hint she may offer about the future of monetary policy. Whereas the Board discussed rate cuts or not would give a picture of how concerned officials are. The more dovish the perspective, the more chances of an interest rate trim in the foreseeable future.
How will the Reserve Bank of Australia’s decision impact AUD/USD?
Ahead of the announcement, the Australian Dollar (AUD) is under strong selling pressure, with the AUD/USD pair approaching the 0.6200 mark and trading at its lowest since March 4. The ongoing slump has little to do with Australia and is purely linked to market panic amid United States (US) tariffs. President Donald Trump is set to launch his “Liberation Day,” that is, massive reciprocal tariffs on Wednesday, while threatening to add more levies on US imports. Financial markets fear this will take its toll on global growth.
Valeria Bednarik, Chief Analyst at FXStreet, notes: “The AUD/USD pair is bearish ahead of the announcement, and the odds that the RBA can trigger a recovery seem limited. The anticipated on-hold decision, the most likely outcome, and the fact that the Board will wait for more data, anticipate that the decision could be a non-event. Tariff-related concerns are expected to keep overshadowing macro announcements.”
“Indeed, a surprise announcement, such as an unexpected rate cut or hike, could result in crazy volatility around the AUD/USD,” Bednarik adds, although clarifying that both are quite unlikely scenarios.
Finally, Bednarik notes: “From a technical point of view, the risk skews to the downside, given that the AUD/USD pair daily chart shows it develops below all its moving averages, while the downward momentum remains strong. Below the 0.6200 mark, the next relevant support is the March monthly low at 0.6186, followed by the 0.6130 price zone. Resistance, on the other hand, comes at around 0.6300, followed by the recent highs in the 0.6330 region.”
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
Economic Indicator
RBA Monetary Policy Statement
At the end of each of the Reserve Bank of Australia (RBA) eight meetings, the RBA’s board releases a post-meeting statement explaining its policy decision. The statement may influence the volatility of the Australian Dollar (AUD) and determine a short-term positive or negative trend. A hawkish view is considered bullish for AUD, whereas a dovish view is considered bearish.