RBA’s Hauser: Whichever measure is used, inflation is too high

Very high inflationary pressures were the clear message from Reserve Bank of Australia (RBA) Deputy Governor Andrew Hauser’s remarks on Thursday. Speaking during the European trading session, Hauser addresses the Sir Leslie Melville Lecture on 'Trust, Expectations and Monetary Policy' at the Australian National University in Canberra.

What Else Did Hauser Highlight?

At the last meeting, the Board held very lively discussions.

No effort was made to influence the market through open-mouth operations.

Growth in consumption has proved more resilient than anticipated.

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RBA: Key Questions Answered

What role does the Reserve Bank of Australia play, and how does it affect the Australian Dollar?

Responsibility for Australia’s interest rates and monetary policy rests with the Reserve Bank of Australia (RBA). Its board of governors takes decisions at 11 meetings each year, supplemented by ad hoc emergency meetings when needed. Maintaining price stability, defined as an inflation rate of 2-3%, is the RBA’s primary mandate. Its mandate 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, either upwards or downwards, are its principal policy instrument. Relatively high rates strengthen the Australian Dollar (AUD), while the reverse is also true. Quantitative easing and quantitative tightening are among the RBA’s other tools.

Why do inflation figures matter for the Australian Dollar?

The easing of cross-border capital controls has changed the way inflation affects currencies in modern times. Traditionally, inflation was viewed as a negative because it erodes the value of money overall; the opposite relationship has since emerged. A moderate increase in inflation now tends to prompt central banks to raise interest rates. Higher rates, in turn, draw capital from global investors looking for attractive returns on their money. The resulting inflows boost demand for the domestic currency, which in Australia’s case is the Australian Dollar.

How can economic indicators move the Australian Dollar?

By indicating an economy’s health, macroeconomic data can influence its currency’s value. Safe, expanding economies attract investors more readily than unstable, contracting ones. As capital inflows rise, so do overall demand for the domestic currency and its value. Among the established indicators that can move AUD are GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys. Economic strength may also prompt the Reserve Bank of Australia to raise interest rates, providing further support to AUD.

How does Quantitative Easing (QE) work, and what does it mean for the Australian Dollar?

When interest rate cuts alone cannot revive the flow of credit through the economy, Quantitative Easing (QE) is an option used in extreme circumstances. Under QE, the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) to purchase assets from financial institutions, typically government or corporate bonds. These purchases supply the institutions with much-needed liquidity. A weaker AUD is the usual outcome of QE.

How does Quantitative tightening (QT) work, and why is it positive for the Australian Dollar?

Once an economic recovery is under way following QE and inflation begins to climb, Quantitative tightening (QT) reverses the easing process. During QE, the Reserve Bank of Australia (RBA) supplies liquidity to financial institutions by purchasing government and corporate bonds. Under QT, it halts further asset purchases and no longer reinvests the principal repaid when bonds in its existing holdings mature. This would support the Australian Dollar, making it a positive, or bullish, development for the currency.