AWARDS
The Australian dollar weakened slightly overnight, failing to break above the 0.7100 level yesterday. The Australian dollar had weakened ahead of last night's RBA monetary policy meeting, partly due to the RBA's reduced expectations of further rate hikes. After raising rates in February, March, and May, the RBA unanimously decided to keep them unchanged for the first time this year at 4.35%.
In its updated monetary policy statement, the RBA acknowledged that financial conditions have tightened this year in response to the three rate hikes, negatively impacting economic activity. The RBA noted that "there are signs of a slowdown in consumer spending growth, as expected, and that housing market dynamics have reversed, with house prices declining in some capital cities." At the same time, the unemployment rate was higher than expected in April. Evidence of slower growth has led market participants to scale back expectations of further RBA rate hikes.
However, the RBA has not ruled out the possibility of further hikes, as both headline and core inflation are considered "still too high." The rise in oil prices, due to the pass-through of inflation to final prices, adds to the already high inflation recorded at the start of the year, which reflected pressures on the economy's productive capacity. The RBA expects demand growth to slow to reduce pressures on productive capacity and stands ready to adopt further tightening measures if necessary.
Overall, today's monetary policy update indicates that the RBA currently feels comfortable keeping rates unchanged in the near term, while continuing to assess the economic impact of the three rate hikes implemented so far this year. The US-Iran deal and the continued decline in energy prices will help ease pressure on the RBA to raise rates further this year. The RBA's recent reduction in rate hike expectations and the downward correction in commodity prices are currently helping the Australian dollar recoup some of the strong gains seen earlier this year. Commodity-linked currencies, the Australian dollar and the Norwegian krone, remain by far the best-performing G10 currencies this year.
