Aussie dollar gains as central bank expects quicker recovery
08:32, 7 December 2021
The Australian dollar made sharp gains against the greenback following the Reserve Bank of Australia’s (RBA) expectations of a quicker recovery of the economy.
During late afternoon trading in Australia, the AUD was up 0.70% versus the USD at 70.97 US cents.
This was despite the RBA keeping the cash rate unchanged and sticking to its plan of buying government bonds at the rate of AUD4bn per week until February 2022. However, the currency gained from RBA’s comments that the economy is not expected to be derailed by the Omicron variant of Covid-19.
Strong economic recovery
“The Australian economy is recovering from the setback caused by the Delta outbreak. High rates of vaccination and substantial policy support are underpinning this recovery. Household consumption is rebounding strongly and the outlook for business investment has improved…The economy is expected to return to its pre-Delta path in the first half of 2022,” RBA Governor Philip Lowe said in a statement on Tuesday.
“Leading indicators point to a strong recovery in the labour market. Job advertisements are at an historically high level and there are reports of firms finding it difficult to hire workers. Wages growth has picked up…A further pick-up in wages growth is expected as the labour market tightens,” he added.
Further, Lowe also said that at the RBA’s meeting in February, the board will consider whether to continue with the bond purchase programme. While the RBA has so far been giving a timeline for possible cash rate increases, this time it simply said that the rate will not be hiked “until actual inflation is sustainably within the 2-3% target range”.
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First rate hike in 2023
Economists expect the RBA to start raising rates by at least early 2023. “The financial markets have gone much further as they anticipate 175bp (basis points) of tightening by end-2023, with the first rate hike as soon as July 2022. We still believe that those expectations are too aggressive given that wage growth won’t reach the 3% mark that the RBA wants to see before the end of next year,” said Marcel Thieliant, senior Australia & New Zealand economist at Capital Economics, in a note.
“We only expect the first rate hike in early-2023. And given the high indebtedness of Australian households, we think that the Bank will have to tread more cautiously than the financial markets anticipate. We’re only forecasting 75bp of rate hikes by end-2023,” he added.
According to Bill Evans, chief economist at Westpac, the February board meeting might see significant announcements by the RBA regarding forecasts and possible direction towards rate hikes.
Key decision in February
Evans said that Lowe will need more time before signalling “a retreat from a the very dovish stance” seen this year.
“We remain comfortable with the view we have held since 18 June that the first-rate hike will be at the February Board meeting in 2023,” he added.
Read more: RBA holds rates but drops bond yield targets
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