- The Reserve Bank of Australia will likely increase the cash rate by 25 basis points.
- Mortgage rates in Australia are becoming a problem for families.
- AUD/USD risks resuming its downtrend and testing the 0.6300 area.
The Reserve Bank of Australia (RBA) will announce its monetary policy decision on 1 November, with board members stuck between a rock and a hard place. The Australian central bank has raised the cash rate at every meeting since May, but was the first to slow the pace of quantitative tightening, rising a modest 25 basis points in October. The latter came after five consecutive increases of 50 basis points.
Australian policymakers jumped on the global tightening bandwagon amid an inflation spiral in May, when the benchmark rate was set at 0.1%. The decision to cut rates in October was taken in view of the rising cost of mortgages. According to the Finder Consumer Sentiment Tracker, as rates jumped from 0.1% to 2.6%, about 30% of homeowners began struggling to pay off their mortgage debt. But if the RBA wants to bring inflation back on target, it will need a more restrictive rate.
Australian inflation out of control
According to the Australian Bureau of Statistics, the Consumer Price Index (CPI) rose 1.8% in the third quarter of the year, while the annual pace of inflation reached 7.3%. The trimmed mean CPI, which smooths out the rise in average prices, rose 6.1% year-on-year, the highest reading since the series began two decades ago.
Finally, like most central banks, the RBA board is mandated to control inflation. Policy makers may be on the lookout for a possible slowdown, but price control is their priority.
For now, financial markets are expecting another 25 basis point increase in December and another 25 basis point increase, although a move of 50 basis point is still on the table given the latest inflation projections.
In any case, the RBA is likely to disappoint the markets. A more surprising growth than expected would increase the risk of a recession, while a conservative one would hardly affect inflation.,
It should be added that the US Federal Reserve (Fed) will meet this week to decide on monetary policy. The US central bank has tightened its monetary policy, already forecasting a further increase of 75 basis points for this meeting. US policymakers are also expected to pave the way for smaller hikes from December. The current interest rate in the US is 3.0%-3.25% and is expected to reach 4.5% by the end of the year.
The RBA later started rallies and began to soften the initials. The conservative stance itself is apathetic, and markets are not expecting a drastic surprise from Governor Philip Lowe.
Possible AUD/USD Scenario
The AUD/USD pair hovers around 0.6400 before the event. The pair climbed from the low of 2022 to 0.6169, and reached a high of 0.6521 before becoming comfortable. It is currently finding buyers near the 38.2% retracement of the mentioned rally at 0.6385. A break below the latter should favor a slide in the price zone. 0.6300, where buyers may be willing to hedge the 61.8% retracement. The pair will resume its downtrend with a daily close below 0.6300.
An Unexpected Bullish Surprise Could Help AUD Restart Its Bull Run, The first resistance level comes at 0.6440, followed by the 0.6500 figure. However, AUD/USD is unlikely to strengthen higher than the monthly high ahead of the US top-tier events later this week.