The RBA dovish statement put pressure on the Australian dollar, but the economy and inflation expectations for 2022 have been raised

In the Asian market on Friday (November 5), the Australian dollar against the US dollar experienced a sharp decline in the previous day, but still weakened, and the overall trend was bearish. The Reserve Bank of Australia lowered its GDP forecast for 2021, but raised its GDP forecast for 2022 to 5.5%; raised its inflation forecast, but it will still only reach 2.5% in 2023. Much depends on wage growth, and the market is currently waiting for US non-agricultural employment data for the day.

The Reserve Bank of Australia raises economic growth and inflation expectations for 2022

The Reserve Bank of Australia expects that the economy will quickly recover from the severe contraction caused by the epidemic in the last quarter, but due to the greater-than-expected impact of global supply pressures, the bank had to raise its inflation expectations.

In its quarterly economic report, the Reserve Bank of Australia admitted that the inflation rate had returned to the target range of 2-3% two years earlier than expected, which forced it to abandon its promise to keep bond yields at an ultra-low level. Policymakers also retracted their forecasts that interest rates would not be raised before 2024, saying that given that the economy is recovering, it is now possible to raise interest rates in 2023.

Although the lockdown caused economic activity to shrink sharply in the third quarter, the world-renowned vaccination rate since then has allowed the economy to reopen and consumption has rebounded sharply.

Reserve Bank of Australia said in a report: "With the further relaxation of restrictions, expected in the fourth quarter and next year a quarter or two quarters domestic demand will rebound quickly." The bank is now expected by the end of this year, gross domestic product (GDP) in The growth rate will drop from the previous 4% to 3%, but the growth rate in 2022 will exceed one percentage point to 5.5%.

The path of the core inflation rate has been significantly improved, so by the end of this year, it will reach 2.25%, compared with the previous forecast of only 1.75%. However, further progress is considered gradual, so by the end of 2023, the inflation rate will only reach 2.5%.

Crucial to this prospect is wage growth, which has lagged significantly over the years and kept inflation below target. The Reserve Bank of Australia believes that wages need to grow at a rate of 3% or more per year to keep inflation within the target range, but it expects to reach this level only by the end of 2023.

It was this restrained forecast that led the Reserve Bank of Australia Chairman Lowe to say that it is "extremely unlikely" to raise interest rates next year, even though the financial market expects the central bank to raise interest rates as early as July. In fact, futures and swap contracts indicate that the current 0.1% cash rate will be close to 1.0% by the end of 2022 and 1.5% by the end of 2023.

Inflationary pressure is strong, employment and wages raise concerns

In recent weeks, the market has fluctuated wildly, digesting the austerity policies of developed countries, causing many policymakers to reverse this trend. The Bank of England gave up the opportunity to raise interest rates on Thursday, shocking investors, while the European Central Bank actively lowered market expectations. The resulting global bond rebound spread to Australian bonds, and the yield on the three-year Treasury bond fell to 0.88%, reversing part of the recent rise of 1.257%.

The market is still vulnerable to unexpected increases in domestic economic data. In particular, the strong data in the third quarter wage report on November 17 may overturn the Reserve Bank of Australia’s cautious outlook. David Plank, head of Australian economics at ANZ, believes that the risk is high. He said: "Rising inflation expectations, increased competition for labor, and the possibility of a "resignation wave" in Australia should accelerate wage growth before 2022. By the end of this year, the annual growth rate will be slightly higher than 3 %."

Plank added: "Adding this data to the stronger global inflation momentum means that we now see that inflation will rise to 2.5% in the first quarter of 2023, which will trigger the Reserve Bank of Australia to tighten monetary policy." ANZ expects that the first interest rate hike will be in May 2023, and there will be two more at the end of the year.

The Australian dollar is facing multiple pressures, and non-agricultural data has attracted attention

After the release of the modest statement, the Australian dollar faced new selling pressure, and the cautious market sentiment before the release of the key US non-agricultural employment data also dragged down the higher-risk Australian dollar.

At the same time, the U.S. dollar index approached a three-week high of 94.47, consolidating a strong rebound momentum. Despite the dovish attitude of Fed Chairman Powell on Wednesday, the rebound in the US dollar shows that the market still expects the Fed to raise interest rates in mid-2022. In addition, the sell-off of the British pound against the U.S. dollar after the Bank of England’s decision coincided with the rebound of the U.S. dollar, putting additional downward pressure on the Australian dollar.

Looking ahead, the currency pair may continue to fluctuate and weaken. Investors will wait for the release of NFP data to get new instructions.


(Australian dollar against the dollar daily chart)

At 11:02 on November 5th, GMT+8, the Australian dollar was quoted at 0.7385/87 against the US dollar.