Inflation too high on any measure, says RBA’s Hauser

Inflationary pressures are very high, Reserve Bank of Australia (RBA) Deputy Governor Andrew Hauser explicitly indicated. He is delivering the Sir Leslie Melville Lecture on 'Trust, Expectations and Monetary Policy' at the Australian National University in Canberra during Thursday’s European trading session.

Further Comments

The last meeting saw very lively discussions among board members.

No effort was made to influence the market through open-mouth operations.

Growth in consumption has proved more resilient than expected.

RBA: Key Questions Answered

The Reserve Bank of Australia’s Role and Its Impact on the Australian Dollar

Australia’s interest rates and monetary policy are managed by the Reserve Bank of Australia (RBA). A board of governors takes decisions at 11 meetings each year, with additional emergency meetings convened when necessary. Maintaining price stability, defined as inflation of 2-3%, is the RBA’s primary mandate. Its remit also includes “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Interest rate increases and cuts are its principal policy instrument. Relatively high rates support the Australian Dollar (AUD), while relatively low rates have the opposite effect. The RBA can also use quantitative easing and quantitative tightening.

Inflation Data and the Australian Dollar’s Value

The relaxation of cross-border capital controls has changed how inflation affects currencies. Traditionally, inflation was viewed as negative because it erodes the value of money. In modern markets, however, the opposite has been true. Moderately higher inflation tends to prompt central banks to raise interest rates. Those higher returns attract capital from global investors seeking a profitable home for their funds, increasing demand for the domestic currency. In Australia, that currency is the Australian Dollar.

Economic Indicators and Their Effect on the Australian Dollar

By measuring an economy’s health, macroeconomic data can affect its currency’s value. Investors favour stable, expanding economies over those that are fragile and contracting. As capital inflows rise, so do overall demand for the domestic currency and its value. Indicators that can move AUD include GDP, Manufacturing and Services PMIs, employment data and consumer sentiment surveys. Economic strength may also prompt the Reserve Bank of Australia to raise interest rates, providing further support for AUD.

Quantitative Easing (QE): How It Affects the Australian Dollar

When interest rate cuts alone cannot restore credit flows, Quantitative Easing (QE) offers a policy tool for extreme conditions. Under QE, the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) to purchase assets from financial institutions. These assets are typically government or corporate bonds, and the purchases supply institutions with much-needed liquidity. A weaker AUD is the usual outcome.

Quantitative Tightening (QT): Implications for the Australian Dollar

Once an economic recovery is under way and inflation begins to rise following QE, Quantitative tightening (QT) reverses that policy. Under QE, the Reserve Bank of Australia (RBA) supplies liquidity by purchasing government and corporate bonds from financial institutions. Under QT, it ceases further asset purchases and no longer reinvests the principal from maturing bonds in its existing holdings. This would support the Australian Dollar, a bullish effect.

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