The Australian dollar continues to trade quietly this week. In Tuesday’s European session, AUD/USD is trading at 0.6456, up 0.30%.
The Reserve Bank of Australia released the minutes of this month’s meeting earlier today. The central bank considered a quarter-point hike but eventually decided to maintain the benchmark cash rate unchanged at 4.1%. RBA board members were split in previous decisions and this meeting seems to have repeated the pattern. The minutes noted that weak growth and high inflation supported the case for increasing interest rates, but the board ultimately opted to pause, due to the risk that the effects of the tightening cycle were yet to be felt (“lags in the transmission of policy through the economy”).
The minutes noted that board members listed weak domestic demand and contagion from China’s slowdown as risk factors for an economic slowdown. Despite these concerns, the RBA has signalled that inflation remains too high and has left the door open to further hikes. Inflation is currently running at 6% and the RBA has forecast that inflation will slow to around 3.25% by the end of 2024 and won’t fall back into the 2%-3% target range until late 2025.
The new RBA Governor, Michelle Bullock, will have to determine a rate path that is suitable for a weak Australian economy that is grappling with high inflation. Bullock has said that upcoming rate decisions will be based on data, but a more proactive approach may be needed rather than simply reacting to the data around the time of a rate meeting.
The Australian dollar is sensitive to Chinese releases and investors will be keeping an eye on the PBOC decision on one-year and five-year loan prime rates on Wednesday. These rates are likely to remain unchanged, but any surprises could have an impact on the movement of the Aussie. China’s slowdown has weighed on the Australian dollar, but the August retail sales and industrial production reports beat expectations and have raised hopes that China’s economic downturn is abating.