Australian Dollar: RBA inflation focus shapes outlook – Commerzbank

Commerzbank’s Volkmar Baur explains that the Reserve Bank of Australia is increasingly focused on high inflation, with trimmed-mean inflation above its 2–3% target band for over a year. He highlights concerns about global and domestic cost pressures, imported inflation via a weaker AUD, and outlines conditions under which further RBA tightening could occur.

RBA stance and AUD implications

"The minutes released early this morning nevertheless make clear just how strongly the RBA’s focus has shifted towards inflation. The central bank is concerned about price pressures for several reasons. First, there are global developments over which it has no control but to which it nevertheless has to respond."

"Another argument was particularly interesting from an FX perspective. The RBA expressed concern that a weaker AUD could contribute to elevated price pressures through imported inflation. In this context, it also noted that a rise in the global neutral interest rate could cause the AUD to depreciate if Australia’s neutral rate had not increased by a similar amount, although the RBA appeared to assume that it had."

"Looking ahead, three factors are therefore likely to be crucial for the RBA. First, what other central banks do. If they raise rates more aggressively than expected, the RBA could feel compelled to tighten further as well to prevent an excessive depreciation of the AUD. Second, developments in energy prices will be important. And third, as far as the domestic economy is concerned, the focus will clearly be on inflation and inflation expectations rather than economic growth."

"We do not expect either the ECB or the Fed to raise rates at their meetings at the end of the month, and therefore do not expect another rate hike from the RBA in early November either. A further move in December cannot be ruled out, however, if energy markets have not eased by then and inflation fails to show initial signs of improvement."