The month ahead is full of important economic events and central banks’ monetary policy decisions that will move financial markets. One is the Reserve Bank of Australia (RBA) decision due on Tuesday, July 5.
The RBA was one of the first central banks to hike the interest rate, or the cash rate target, in response to rising inflation. Yet, it is doing so at a pace that does not match the rise in the interest rate in the United States.
As such, the cash rate target ahead of Tuesday’s decision is 0.85%, and the market participants expect either a 25bp or a 50bp rate hike. But the bias is that the RBA will choose the most aggressive option and move the cash rate target higher by 50bp to 1.35%.
Australian inflation is much higher than the RBA’s target
According to the RBA, an appropriate target for monetary policy is to achieve an inflation rate in a range of 2%-3% over time. Such an inflation rate gives the central bank enough space to react in an economic downturn and also fuels a steady economic growth rate in expansionary times.
But inflation now exceeds 5% in Australia.
While not so high as in the United States (8.5%) or in the Euro area (8.6%), Australian inflation sits well above the RBA’s target. Hence, the central bank reacted by raising the interest rate, and it will continue to do so until inflation cools down.
AUD remains weak against the US dollar
The interest rate differential is one of the main drivers in the movements of an exchange rate. The exchange rate reflects the value of one currency in terms of another, and by simply
