The Reserve Bank of Australia announces its first policy decision of the year at 03:30 GMT on Tuesday. When Bank Governor Philip Lowe last spoke in mid-December, he told investors he did not believe the conditions for a rate hike would be in place in 2022. Since then , the labor market has tightened further, while underlying measures of inflation have reached their highest levels since 2014. Will the RBA update its forward guidance to bring it more in line with expectations? of the market, and would this provide significant support for the lackluster Australian dollar?
Learning to live with the virus
The Omicron wave finally seems to be easing in Australia, which after abandoning its zero-Covid policy, the nation is learning to live with the virus. After vaccinating much of its adult population, Australia followed the British approach, keeping much of the economy open while reimposing some modest restrictions as the Omicron variant swept the country.
The change in the government’s response to the fight against the virus has been good news for the Australian economy. Overall employment is now higher than it was before the pandemic, consumer spending has strengthened significantly in recent months and inflationary pressures have started to build. Although Omicron is expected to have slowed its growth in January, the impact is likely to be short-lived.
Is this the end of the QE path?
So there are good reasons for the RBA to abandon its bond-buying program early, perhaps as early as the February meeting. Policymakers had always set this meeting as the one where they would review the program, but rather than further reducing its pace before finishing it in May as previously reported, there is a lot of pressure to conclude QE now.
Australia’s consumer price index jumped 1.3% stronger than expected between the third and fourth quarters and although the annual rate was relatively low at 3.2%, the two closely watched indicators of the RBA core inflation rose to its highest level in more than seven years in Q4.
Markets not aligned with the RBA
While an abrupt end to QE would certainly be seen as a hawkish tilt, what investors will pay more attention to are the Bank’s forecasts for the cash rate, as well as inflation and GDP growth. in the quarterly monetary policy statement to be released the following Friday. Governor Lowe previously signaled that rates were unlikely to be raised before the end of 2023 at the earliest. But markets don’t just think the RBA will start raising rates in 2022, they’ve fully priced in five increases.
This leaves a lot of room for disappointment. Still, increased betting on higher rates has done little to boost the local dollar. The decline in the global growth outlook due to Omicron and tighter monetary policy around the world, and more specifically for Australia, the economic slowdown in China, has weighed on the Aussie lately.
Aussie bulls hope for hawkish surprise
Against the US Dollar, the Aussie is currently testing the $0.71 level after failing to overcome resistance at its 50-day moving average (MA). If the RBA does not advance its rate hike schedule, a return to the December 1+ year low of $0.6991 is very possible.
In the bullish scenario, if Lowe’s signals a rate hike this year, the Aussie/Dollar could surge towards the January high of $0.7314 initially, before attempting to hit the 200-day MA just below. from the $0.74 level.
However, it remains to be seen if the RBA is still ready to make such a drastic shift to its expected rate path. Early 2023 could be seen as a more realistic timeframe and policymakers will likely want to wait a bit longer before committing to liftoff in 2022. Even if they were to surprise with a very hawkish forward guidance, it would likely be matched conditions, such as wanting to see a significant recovery in wage growth.