Reserve Bank of Australia (RBA) Assistant Governor Christopher Kent announced adjustments to repo rates on Tuesday, clarifying that these changes do not signify a shift in the bank’s monetary policy stance. The modifications include increasing the price of all new Open Market Operations (OMO) repos by 5 to 10 basis points above the cash rate target. Furthermore, a seven-day term will be introduced alongside the existing 28-day term at each weekly OMO, effective April 9.
At the time of reporting, the AUD/USD exchange rate exhibited a 0.16% increase, trading at 0.6290.
The RBA, responsible for setting interest rates and managing Australia’s monetary policy, operates under a mandate to maintain price stability, targeting an inflation rate of 2-3%, while also contributing to currency stability, full employment, and economic prosperity. Its primary tool is adjusting interest rates; higher rates typically strengthen the Australian Dollar (AUD), and vice versa. Additional tools include quantitative easing and tightening.
Inflation data, while historically viewed negatively for currencies, now often prompts central banks to raise interest rates, attracting capital inflows and increasing demand for the local currency.
Macroeconomic data, reflecting the health of the economy, influences currency value. Investors favor stable and growing economies, leading to increased capital inflows and a stronger domestic currency. Key indicators such as GDP, Purchasing Managers’ Indices (PMIs), employment figures, and consumer sentiment surveys can impact the AUD. A robust economy may encourage the RBA to raise interest rates, further supporting the AUD.
Quantitative Easing (QE), employed in situations where interest rate reductions are insufficient, involves the RBA creating AUD to purchase assets, typically government or corporate bonds, from financial institutions to provide liquidity. QE generally weakens the AUD.
Quantitative Tightening (QT), the reverse of QE, occurs during economic recovery and rising inflation. The RBA ceases asset purchases and reinvestment of maturing bond principal. This is generally positive for the Australian Dollar.
