RBA Preview: Dull Event But AUD Might Make It Interesting

• Published on
• 01 Dec 2020, 12:46 PM

By Sophia Rodrigues

The Reserve Bank of Australia’s last monetary policy decision of this year is expected to be a dull event but the statement would still need to be scrutinized for comments on the exchange rate and on Quantitative Easing.

The RBA’s statement is due in less than two hours at 1430 hours. The cash rate target is expected to be left unchanged at 10bps along with other key interest rates, and QE measures.

Last month, the RBA announced a package of measures that was aimed at supporting economic activity and job creation. The RBA launched QE with the expectation that the lower risk-free yield curve will flow through to lower rates for borrowers, and keep the exchange rate lower than it would otherwise be.

The Australian dollar had depreciated in anticipation of further easing by the RBA and stayed lower after the easing was delivered. But in recent weeks, the exchange rate has gone up due to a combination of lower U.S. dollar, positive local data and rise in commodity prices.

The AUD is currently at $0.7355 compared with around $0.70 in early November.

The rise in the exchange rate may be in line with fundamentals but it still means it is no longer lower than it would otherwise be. Given that the RBA’s expectation is for the Australian dollar to be lower than otherwise, it might view this as a worrying trend.

On the QE, the RBA is likely to reiterate it is carefully monitoring the impact of its bond purchases on the market. “We are alert to any sign of dysfunction in the market, and are prepared to adjust the program if necessary,” Deputy Governor Guy Debelle said in a recent speech, and this line would likely appear in today’s statement.

Commentary on the economy, mainly growth and labor market, is likely to be on the optimistic side but the RBA will remind once again that the recovery will be uneven, and policy will remain easy for longer.

--Contact: Sophia@centralbankintel.com