Could the Australian Dollar further strengthen after the RBA hinted at upcoming rate increases?

2 May 2023, Tuesday
Could the Australian Dollar further strengthen after the RBA hinted at upcoming rate increases

What the Australian Dollar’s Rise Means for You


The Australian Dollar is Stronger


The Australian Dollar has gone up to over 67 cents after the Reserve Bank of Australia (RBA) made a decision to tighten monetary policy. This means that the RBA has increased the cash rate to 3.85% by 25 basis points.


Why Did the RBA Make This Decision?


The RBA made this decision because they want to make sure that inflation returns to their target range. They also mentioned that the labor market is tight and wages are increasing.


What Does This Mean for Australia?


This week, we will see the release of Australian retail sales and trade data, followed by building approvals figures next week. The Citibank Economic Surprise Index (ESI) suggests that there may be good news for the Australian economy.


What Does This Mean for the Rest of the World?


Before the RBA made their decision, interest rate markets were predicting a 50/50 chance of a 25 basis point hike later this year. Now that the decision has been made, the market is adjusting and analyzing the statement. The reaction in AUD/USD has been significant.


What About Inflation?


Last week, inflation figures caused some concern. The headline CPI of 7.0% was slightly higher than the forecast of 6.9% year-on-year to the end of March. The RBA’s preferred measure of trimmed-mean CPI was 6.6% year-on-year for the same period instead of estimates of 6.7% and 6.9% previously.


What is Trimmed-Mean CPI?


The trimmed-mean CPI looks at the middle of 70% of the headline CPI basket. This means that it eliminates the 15% of the basket that rose the most and least. However, this approach may not be as useful when inflation pressures are moving significantly up or down.


What Does This Mean for Inflation?


The RBA is back in inflation-fighting mode. The Federal Reserve and European Central Bank (ECB) will meet later this week while the Bank of England will gather next week. Interest rate markets have priced in a 25 basis point lift by all three central banks.


What Does This Mean for You?


The rise in the Australian Dollar may affect the prices of goods and services that you buy. Keep an eye on inflation rates and how they may impact your budget.