Australian Dollar : Hawkish hold keeps risks alive – TD Securities

TD Securities’ Prashant Newnaha and Alex Loo note that the Reserve Bank of Australia left the cash rate at 4.35% in a unanimous decision, with the Statement and updated forecasts sounding less hawkish than expected. However, Governor Bullock emphasized that another hike remains possible if upside inflation risks materialize, leaving the Australian Dollar sensitive to incoming data and RBA communications.

Hawkish hold with upside inflation risks

“The RBA kept the cash rate on hold at 4.35% as expected in a unanimous decision. The Statement read less hawkishly than anticipated and the revised forecasts imply a less hawkish stance too. However, the Press Conference took on a hawkish tone with the Governor stressing a number of times that another hike is a possibility, a risk to our call for a prolonged RBA hold.”

“However, the Statement and the forecasts published today suggest a rate hike is not the Bank’s central forecast, implying the bar for a follow-up RBA hike this year has been lifted.”

“As stated above, the RBA’s forecasts don’t speak to another hike and the Bank does not appear to have the appetite to hike preemptively either.”

“Clearly the RBA is not out of the woods. The Bank’s trimmed mean CPI forecasts for Q3 and Q4 imply 0.8% q/q prints for both quarters. While the Statement and the forecasts don’t signal alarm, the Governor was at pains to state where the risks lie for inflation, and they are to the upside.”

“Indeed, if the RBA’s 4.35% cash rate did not get the job done on inflation previously and the Minutes of the June meeting noted estimates of the real neutral rate have risen over preceding years (in addition to observations detailed above), then the RBA may not have the wiggle room it needs to get inflation back to target in a reasonable time frame.”

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