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RBA likely to hike interest rates once more, boosting Australian Dollar

November 7, 2023| Forex Market


  • Interest rate in Australia is set to rise by 25 bps from 4.10% to 4.35% in November.
  • The Reserve Bank of Australia’s Governor Michele Bullock could stick to the hawkish tone.
  • Volatility could ramp up around the Australian Dollar on Melbourne Cup day.

The Reserve Bank of Australia (RBA) is widely expected to resume tightening when it meets on Melbourne Cup Tuesday, having held the benchmark interest rate steady for four straight meetings.

The central focus of the RBA meeting will be on whether Governor Michele Bullock sticks to the recent hawkish rhetoric, hinting at further interest rate hikes.

Reserve Bank of Australia set to resume interest-rate hikes

The current market positioning suggests that a 25 basis points (bps) increase to the Reserve Bank of Australia’s Official Cash Rate (OCR) is fully baked on Tuesday. The decision will be announced at 03:30 GMT, with the RBA expected to lift the interest rate from 4.10% to 4.35% after a four-month hiatus from the tightening cycle.

The big four Australian banks, ANZ, CBA, Westpac and NAB, revised their call for an RBA rate hike, following the resurgence of inflation and hawkish commentary from the RBA policymakers.

Data from the Australian Bureau of Statistics (ABS) showed the Consumer Price Index (CPI) rose 1.2% in the third quarter, above market forecasts of 1.1% and up from a 0.8% increase the previous quarter. For September alone, the CPI rose 5.6% year-on-year, up from 5.2% in August.

A closely-watched measure of core CPI, the trimmed mean, rose 1.2% in the third quarter, topping expectations of 1.1%. Meanwhile, Australian Retail Sales rose for the first time in four quarters in the July-September period, rebounding 0.2% QoQ as against the previous drop of 0.6%.

Despite signs of a cooling Australian labor market, robust consumer spending supports the case for the RBA to resume interest rate hikes. Commenting on the inflation data, Reserve Bank of Australia (RBA) Governor Michele Bullock said that goods prices are coming down but services inflation remains persistent. “Services inflation is higher than what we are comfortable with,” she said.

Bullock had mentioned last month, “[the RBA’s] board will not hesitate to raise rates if there is a material upward revision to the inflation outlook.”

Christopher Kent, the RBA’s assistant governor of financial markets, had said at a Bloomberg event in early October, the board “may need to raise interest rates in the future to bring inflation down. I think that’s a reflection of the fact that we wouldn’t want it to be much slower.”

Previewing the RBA policy decision, analysts at BBH said,  “Reserve Bank of Australia meets Tuesday and is expected to hike rates 25 bp to 4.35%.  A handful of analysts polled by Bloomberg look for steady rates, while World Interest Rate Probabilities (WIRP) suggest 50% odds.  Those odds rise to 75% for December 5 and full priced in for February 6, with odds of a second hike topping out near 35% in Q2 2024.”

How will the RBA interest rate decision impact AUD/USD?

Amidst increased expectations of an interest rate hike, the Australian Dollar (AUD) is likely to witness big moves on the RBA policy announcement. Traders will closely scrutinize the RBA policy statement for its language, signaling whether Governor Bullock keeps the door open for more rate hikes.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, notes key technicals to trade AUD/USD on the policy outcome. “AUD/USD is sitting at the highest level in three months, clinging to the 100-day Simple Moving Average (SMA) at 0.6511 ahead of Tuesday’s RBA showdown. The 14-day Relative Strength Index (RSI) has flatlined but holds comfortably above the 50 level, keeping the upside risks intact for the Aussie pair.”

“Aussie buyers need acceptance above 100-day SMA at 0.6511 on a daily closing basis to initiate a meaningful recovery toward the downward-sloping 200-day SMA at 0.6618. The next upside barrier is seen at the 0.6650 psychological level. On the downside, static support aligns at 0.6450, below which a test of Friday’s low of 0.6419 cannot be ruled out. Further south, the 50-day SMA at 0.6395 could come into play.”

Interest rates FAQs

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

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