The Reserve Bank of Australia’s Statement on Monetary Policy (SoMP) sets out the Bank’s assessment of current economic conditions, both domestic and international, along with the outlook for Australian inflation and output growth. A number of boxes on topics of special interest are also published. The Statement is issued four times a year.
Headlines via Reuters:
- Board expects rates will need to increase further
- Not on pre-set path, will hike in larger steps or pause if considered necessary
- Rates have already risen significantly, mindful policy operates with a lag
- Sees global growth slowing significantly, risks from synchronised central bank tightening
- Domestic effect of rising energy prices to be much greater than first assumed
- Retail gas and electricity prices seen rising 20-30% over 2023
- Cuts economic growth forecasts sees gdp dec 2022 2.9%, dec 2023 1.4%, dec 2024 1.6%
- Lifts inflation
Inflation
Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply in relation to the wealth produced (measured with GDP). As such, this generates pressure of demand on a supply that does not increase at the same rate. The consumer price index then increases, generating inflation.How Does Inflation Affect Forex?The level of inflation has a direct impact on the exchange rate between two currencies on several levels.This includes purchasing power parity, which attempts to compare different purchasing powers of each country according to the general price level. In doing so, this makes it possible to determine the country with the most expensive cost of living.The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates on the forex market.Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on foreign exchange. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the forex market.
Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply in relation to the wealth produced (measured with GDP). As such, this generates pressure of demand on a supply that does not increase at the same rate. The consumer price index then increases, generating inflation.How Does Inflation Affect Forex?The level of inflation has a direct impact on the exchange rate between two currencies on several levels.This includes purchasing power parity, which attempts to compare different purchasing powers of each country according to the general price level. In doing so, this makes it possible to determine the country with the most expensive cost of living.The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates on the forex market.Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on foreign exchange. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the forex market.
Read this Term forecasts sees cpi dec 2022 8.0%, dec 2023 4.7%, dec 2024 3.2%
- Forecasts trimmed mean inflation dec 2022 6.5%, dec 2023 3.8%, dec 2024 3.2%
- Lifts unemployment forecasts sees dec 2022 3.4%, dec 2023 3.7%, dec 2024 4.3%
- Lifts wage growth forecasts sees dec 2022 3.1%, dec 2023 3.9%, dec 2024 3.9%
- Forecasts assume cash rate peaks around 3.5%, falls to 3.0% by end 2024
- Many uncertainties surrounding these forecasts, particularly on consumption
- Wage-, price-setting behaviour a material risk to inflation outlook
- Risks to china economy skewed to downside by zero-covid rules, property weakness
The trimmed mean CPI (i.e. the bank’s indicator of core inflation) is not expected to be back in the target band over the horizon forecast. The RBA forecast it at 3.2% in December of 2024. More than two years away. And yet the Bank is slowing the pace of rate hikes.
The RBA has two jobs (3 if you count financial stability, and everyone does). One is holding inflation steady, the 2 to 3% band is this target. Te other is full employment. The Bank is forecasting a rise in the jobless rate, so perhaps the backing off on rate hikes is intended to slow the rise in unemployment. Trciky times for the Bank.
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