RBA Hiked the Cash Rate by 25 Basis Points but Offered no Commitment to More

Highlights

• China imports rebounded as the Government pledges to relax policies and improve trade ties with key trading partners.
• The RBA raised the cash rate by 25 basis points but refrained from signaling a December move.
• Later today, FOMC member commentary will draw investor attention.

China Trade Data Affirms a Weak Overseas Demand Environment

In October, exports declined by 6.4% year-on-year versus a 6.2% decline in September. Economists forecast exports to fall by 3.3%. However, imports unexpectedly rebounded in October, rising by 3.0% year-over-year. Imports were down 6.2% in September. Economists forecast imports to decline by 4.8%. The US dollar trade balance narrowed from $77.71 billion to $56.53 billion.

The figures were significant. While overseas demand remains weak, domestic demand could fuel economies reliant on trade with China.

On Sunday, China Premier Li Qiang pledged to relax policies and to import more goods. Improving trade terms for export-orientated economies, including Australia, would boost economic growth.

The pledge of more imports countered the effect of weaker exports on riskier assets. However, the markets were also cautious ahead of the heavily anticipated RBA monetary policy decision.

RBA Hikes the Cash Rate by 25 Basis Points to 4.35%

On Tuesday, the RBA raised the cash rate by 25 basis points to 4.35%. Economists expected a 25-basis point rate hike. However, there was uncertainty about a commitment to further rate hikes to combat inflation.

According to the Rate Statement,

• The RBA expects inflation to be around 3.5% by the end of 2024 and at the top of the 2-3% target by the end of 2025. In October, the RBA expected inflation to be within the 2-3% target range in late 2025.
• In assessing recent economic indicators, the Board saw an increased risk of inflation remaining higher for longer.
• The Australian economy has performed more strongly than expected, and the labor market remains tight.
• However, medium-term inflation expectations have remained consistent with the inflation target.
• Service price inflation remains a concern, with lags in the effect of policy tightening creating uncertainty.
• Australian household spending, the Chinese economy, and conflicts added to the uncertain outlook.

Notably, there was no firm commitment to raising rates higher in December or early 2024. The lack of a commitment to further rate hikes left investors with the possibility of a one-and-done scenario. The RBA Statement was dovish despite the Board remaining ‘resolute in its determination to return inflation to target.’

The Aussie Dollar Reaction to China Trade and the RBA

Before the trade data and RBA interest rate decision, the AUD/USD rose to a high of $0.64888 before easing back.

Weak China exports and RBA rate decision apprehension led to a post-trade data low of $0.64818. However, investors responded to the RBA interest rate decision and rate statement. The Australian dollar rose to a high of $0.65012 before sliding to a low of $0.64552.

This morning, the AUD/USD was 0.43% to $0.64605.

Next Up

On Tuesday, FOMC member speeches will garner investor interest. FOMC voting members Michael Barr, Lorie Logan, Christopher Waller, and John Williams will speak. Fed Vice Chair John Williams traditionally has more influence on investor sentiment toward the Fed rate path. However, investors will likely respond to FOMC member references to the economy, inflation, and interest rates.

With Fed commentary in focus, investors will likely ignore US trade data for September. The US trade-to-GDP ratio is less than 30% and is unlikely to influence the Fed rate path.