RBA leading the way in tightening policy amid energy price shock

AUD: RBA narrowly votes for back-to-back rate hike

The main development overnight was the RBA’s decision to tighten monetary policy for the second consecutive meeting. The policy rate was raised by a further 25bps to 4.10% which is now the highest rate amongst G10 central banks. The Australian dollar initially strengthened in response to the rate hike hitting a high of 0.7094 against the US dollar but has since given back all of those gains. The decision to raise rates today was a closer call than expected backed by a slim majority of five out of nine MPC members. Governor Bullock explained in the press conference that the split decision was a reflection of the active policy debate on the board and its willingness to challenge different points of view. She stated that the “robust” discussion was focused on whether to raise rates now or wait until the May meeting. She added that the dissenters preferred a hawkish hold and put more weight on current uncertainties. Despite the close vote, Australian rate market participants currently expect the RBA to hike rates again as soon as the next policy meeting in May. In the press conference, Governor Bullock emphasized that today’s decision doesn’t say anything about the forward policy path. She couldn’t say whether this is a front-loading of rate hikes of this is one of many rate hikes. The RBA did judge though that inflation is likely to remain above target for some time and that risks have “tilted further to the upside” leaving the door open to further hikes.

Today’s decision to raise rates reflected the RBA’s judgement that “there is a material risk that inflation will remain above target for longer than previously anticipated”. Information since February suggested that some of the increase in inflation reflects greater capacity pressures due in part to greater momentum in demand in the latter part of 2025. Growth in private demand strengthened substantially more than was expected in the middle of last year. The RBA also acknowledged that that the conflict in the Middle East has  resulted in sharply higher fuel prices, which, “if  sustained, will add to inflation”. At the same time, the RBA acknowledged that the conflict in the Middle East poses substantial risks in both directions. “A longer or more severe conflict could put further upward pressure on global energy prices” pushing up near-term inflation and also increase inflation further out if it impairs supply capacity or price rises get built into longer-term inflation expectations”. However, “higher prices and prolonged uncertainty may also cause growth to be lower in major trading partners and in Australia”. In the press conference, Governor Bullock stated that higher fuel prices were not the reason for today’s rate hike but the Middle East conflict has heightened concerns about ongoing inflation. Overall, the hawkish comments relating to inflation risks from the conflict support market expectations for two further hikes this year. Rising yields in Australia remain a tailwind for the Aussie alongside higher commodity prices which have both helped it to outperform this year. The energy price shock would have to deliver a bigger negative global growth shock and deeper risk asset correction to trigger a reversal of Aussie strength.  

RBA POLICY RATE IS HIGHEST AMONG G10 CENTRAL BANKS

Source: Bloomberg, Macrobond & MUFG GMR

JPY: Japan is stepping up verbal intervention as USD/JPY approaches 160.00

USD/JPY has continued to trade just below the 160.00 overnight hitting a high of 159.49. The pair has temporarily stalled at just below 160.00 reflecting renewed concerns over the risk of intervention to support the yen, and a broader loss  of upward momentum for the US dollar yesterday. The dollar index dropped back below 100.00. Finance Minister Katayama has stepped up verbal intervention at the start of this week. She stated overnight that “there has been significant volatility across financial markets overall” while suggesting that the moves in the yen have not been aligned with fundamentals for a while, adding that the deviation appears particularly significant at present. She then warned that “considering the impact exchange rates have on people’s daily lives, we are fully prepared to respond at any time”. It follows on from her comments yesterday that they are ready to take “bold action” if needed. The comments in recent days have cast doubt on the view that was building among market participants that Japanese policymakers may be more tolerant to allow the yen to weaken in the near-term in response to the negative energy price shock. The yen has weakened by around 2% against the US dollar since the Middle East conflict began. The scale of the self-off is broadly in line with US dollar strength against other G10 currencies highlighting that the recent yen sell-off is not an outlier.

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Source: Bloomberg & Investing.com