The RBA holds the decisive factor in determining Australia’s official cash rate, with the aim of ensuring that a stable Aussie currency is maintained and maintenance of full employment is achieved. Moreover, the central bank seeks to ensure that domestic economic prosperity and welfare of the Australian people are met.
The RBA meets eleven times each year, on the first Tuesday of each month (except January).
Key RBA Board Members:
- RBA Governor Phillip Lowe: Lowe commenced as Governor on 18 September 2016 and holds the most important role in deciding what Australia’s interest rate should be. In particular, markets take into account Lowe’s outlook about domestic and global economic trajectory to help determine how the central bank will decide interest rates in the future.
- Deputy Governor Guy Debelle: Debelle commenced as Deputy Governor on 18 September 2016 and alongside Lowe and is one of the top influencers in the board committee to determine domestic interest rate.
Factor that can influence RBA’s cash rate decision:
- Inflation: Inflation provides an overview on the country’s credit and debt cycle. The RBA’s inflation target band is between 2-3% and remains to be one of the key fundamental data that influences the RBA’s cash rate decision.
- GDP growth: Australia’s GDP growth is vital in helping the central bank gauge how the domestic economy is expanding and whether an interest rate cut or hike is needed to support economic growth at a sustainable pace.
- Housing prices: Any changes in housing prices will impact consumer spending habits and the supply and demand for houses, including people being more willing to purchase houses using a loan if interest rates are currently low.
- Labour market: Labour market data is fundamental in helping central bankers understand how employment conditions can impact consumer behaviour and spending habits. If wages growth remains low or unemployment rate grows, then this will directly impact Australia’s GDP growth since consumer expenditure accounts for a large percentage in economic prosperity.
- Purchasing Managers Index (PMI): The PMI gives a report about managers’ outlook about future economic conditions and how this impacts their business sentiment. This is an important influence in determining whether businesses may contract or expand in producing goods or services for the future.
- Macroeconomic factors: Global risk factors and uncertainties such as the recent coronavirus outbreak and geopolitical events, including the EU and the UK trying to reach a fair trade deal after Brexit, are crucial for the RBA to decide how these events may impact domestic economic growth.
Impact of RBA’s Official Cash Rate on the AUD
- Foreign Exchange Market:
- If the RBA has a hawkish outlook about the domestic economy and decides to lift interest rates, then the AUD will generally gain an upward momentum as a result of the positive news. The RBA’s sentiment about economic conditions in its policy statement are also important since a positive than expected outlook by the market will also boost the value of the AUD.
- On the other hand, a dovish outlook where the RBA decides to cut interest rates may potentially drive the AUD lower due to a weak domestic economy.
- Equity Market:
- A cut in interest rates is commonly a positive signal for the equities market, in particular Australian shares, since companies are more likely to take on loans and make business investments due to lower interest payments. Moreover, a lower interest rate may boost domestic company earnings since consumers may be willing to spend more and help sales growth.
- Vice versa, a hike in interest rates is generally viewed as negative for the Australian equities market due to higher loan costs that can affect companys’ earnings, as well as consumers being encouraged to spend less.