Australia – 50bps Hike Within Expectations

As expected, the Reserve Bank of Australia (RBA) raised its cash rate target by another 50bps to 2.35%.

Now at 2.35%, the rate is edging closer to a "neutral" rate. On that note, there is a greater chance that rates may now continue to rise at a slower pace in the remaining period of 2022.

The RBA’s latest statement did not vary much from that in August. Although the board foresees rate hikes in the coming months, it is not a pre-set path. The size and timing of future interest rate increases will be guided by incoming data and the assessment on inflation and the labour market outlook.

With monetary lagging the real economy and inflation, the future rate tightening is likely around 25bps to avoid over-tightening and damaging the economy unnecessarily. This would give more time for the economy to respond to the RBA's tightening policy. But there is nothing to stop further 50bps hikes.

The AUD may struggle to recover amid external challenges The RBA policy is unlikely to have a major impact on AUD moves as observed since the start of 2022.

External factors, in particular risk sentiment and China’s outlook, remain key for the AUD outlook in the near term, while downside risks are still quite elevated.

Our forecasts for the AUD/USD is still a small recovery by year-end. But that is due to the USD seasonal weakness in December and any rally may still struggle to go far beyond the 0.70 mark.

Source: AmInvest Research - 7 Sept 2022