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RBA Maintains 4.35% Cash Rate, Acknowledges Subdued Inflation Trend

RBA Maintains 4.35% Cash Rate, Acknowledges Subdued Inflation Trend

The RBA decided to keep the cash rate steady at 4.35% on Tuesday and expressed a mix of uncertainties and positivity regarding inflation, indicating a reluctance to raise rates.  

Highlights

  • RBA maintains the cash rate at 4.35%, as anticipated.
  • The Rate Statement conveyed a pessimistic tone, as the RBA acknowledged subdued inflation and potential weakening in labor market conditions.
  • Upcoming events include European and US Service reports, as well as the US JOLTs Job Openings.

The RBA interest rate decision

On Tuesday, December 5, 2023, the RBA opted to keep the cash rate unchanged at 4.35%, in line with economists' forecasts. Recent inflation and retail sales figures bolstered expectations for the RBA to halt its rate hike cycle. The market's attention shifted to the RBA Rate Statement following the policy decision.

RBA Rate Statement Indicates Policy Shift Away from Rate Hikes
The RBA Rate Statement attracted significant investor focus. Key points from the statement included:

  1. Limited economic data since the November meeting meeting, aligning with expectations.
  2. The Monthly CPI Indicator suggested a continued moderation in inflation.
  3. RBA Board members anticipate limited wage growth and a potential loosening in labor market conditions.
  4. Medium-term inflation expectations have so far been consistent with the inflation target.
  5. Persistent service price inflation could impact inflation in Australia.
  6. Uncertainty persists regarding the Chinese economic outlook and overseas conflicts, potentially impacting growth.
  7. The domestic outlook for household consumption remains uncertain.
  8. The Board remains steadfast in its commitment to restoring inflation to the target level and is prepared to take necessary measures to achieve this.

Aussie Dollar Response to the Rate Statement

Before the RBA interest rate decision and Rate Statement, the AUD/USD reached a peak of $0.66217 before dropping to a low of $0.65961.

However, in reaction to the decision and Rate Statement, the value of the Aussie dollar surged to a high of $0.66062 before declining to a low of $0.65713.

This morning, the Australian dollar was down 0.66% at $0.65758.

Focus on European PMIs

Later today, investor attention will turn to the service PMIs from Europe. A positive revision to the Eurozone services PMI could alleviate concerns about a prolonged economic downturn. Stronger-than-expected figures might also support the ECB's intention to maintain higher interest rates for an extended period, potentially impacting the economy and demand.

Notable: US ISM Non-Manufacturing PMI and JOLTs Job Openings

Nevertheless, the ISM Non-Manufacturing PMI and US JOLTs are likely to have a more significant impact on global markets.

An unexpected decline in the ISM Non-Manufacturing PMI and a larger-than-expected decrease in job openings could fuel expectations of a Fed rate cut in Q1 2024. Investors should closely consider the sub-components of these reports.

Divergent outcomes may alleviate expectations of a Fed rate cut.

Rises in ISM prices and ISM employment could indicate an upturn in demand-driven inflation. Service providers might pass on increased input costs (including higher wages) to consumers. Furthermore, a higher JOLTs quit rate would demonstrate confidence in the US economy, supporting wage growth, consumption, and demand-driven inflation.  

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