RBA’s Hauser says inflation is too high on every measure

Inflationary pressures remain very high, Reserve Bank of Australia (RBA) Deputy Governor Andrew Hauser explicitly signalled in his remarks. He is speaking during Thursday’s European trading session at the Australian National University in Canberra, delivering the Sir Leslie Melville Lecture on 'Trust, Expectations and Monetary Policy'.

Further comments

The last meeting saw very lively discussions among board members.

No attempt was made to steer markets through verbal intervention.

Growth in consumption has proved more resilient than expected.

RBA: Frequently Asked Questions

The Reserve Bank of Australia Influences the Australian Dollar Through Monetary Policy

Responsibility for setting Australia’s interest rates and conducting monetary policy rests with the Reserve Bank of Australia (RBA). A board of governors takes decisions at 11 scheduled meetings each year, with additional emergency meetings convened when necessary. Maintaining price stability, defined as inflation of 2-3%, is the RBA’s principal mandate. Its remit also includes “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Adjustments to interest rates are its main means of pursuing these objectives. Relatively high rates strengthen the Australian Dollar (AUD), while the reverse also applies. Quantitative easing and quantitative tightening are among the RBA’s other policy instruments.

Inflation Data Shapes Demand for the Australian Dollar

The traditional view held that inflation was detrimental to currencies because it erodes the value of money. In modern times, however, the easing of cross-border capital controls has reversed that relationship. A moderate increase in inflation now tends to prompt central banks to raise interest rates. Higher rates, in turn, attract additional capital from international investors looking for an attractive return on their funds. The resulting increase in demand supports the domestic currency, which in Australia’s case is the Australian Dollar.

Economic Indicators Help Determine the Australian Dollar’s Value

By indicating the health of an economy, macroeconomic releases can affect the value of its currency. Stable, expanding economies are more attractive to investors than fragile economies that are contracting. As capital inflows rise, so do overall demand for the domestic currency and its value. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys are among the established indicators that can move AUD. Economic strength may also prompt the Reserve Bank of Australia to raise interest rates, providing further support for AUD.

Quantitative Easing (QE) Typically Weakens the Australian Dollar

When interest rate cuts alone cannot restore credit flows through the economy, Quantitative Easing (QE) offers a policy tool for use in extreme circumstances. Under QE, the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) to purchase assets from financial institutions, supplying them with much-needed liquidity. Those assets are generally government or corporate bonds. The usual effect of QE is a weaker AUD.

Quantitative Tightening (QT) Would Support the Australian Dollar

Once an economic recovery is under way and inflation begins to rise following QE, central banks undertake its opposite: Quantitative tightening (QT). Under QE, the Reserve Bank of Australia (RBA) supplies liquidity to financial institutions by purchasing government and corporate bonds. QT instead involves halting further asset purchases and ceasing to reinvest the principal repaid as existing bond holdings mature. This would have a positive, or bullish, effect on the Australian Dollar.

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