RBA Hikes Interest Rate Guidance, Is BoE Next?

As expected, the Reserve Bank of Australia raised its key interest rate guidance from 1.35 percent to 1.85 percent in its latest monetary policy decision. The central bank’s balancing act between containing inflation with rising interest rates while maintaining economic growth is a difficult one.

“The outlook for global economic growth has been downgraded due to pressures on real incomes from higher inflation, the tightening of monetary policy in most countries...” RBA Governor Philip Lowe.

In addition, inflation in Australia is higher than it has been since the 1990’s and the central bank will do whatever is necessary to return to its normal target range of 2 to 3 percent, it said. Nonetheless, the country’s economy is growing and GDP is forecast to reach 3.25 percent for the full year. The central bank based its assumptions on resilient employment and consumer spending conditions, according to its statement. An uptick in China’s industrial activity is also supportive of the Australian economy.

The next central bank to issue its monetary policy analysis and interest rate decision is the Bank of England (BoE) which is set to meet on Thursday, August 4. The BoE is expected to raise its key interest rate guidance to cool down inflation, which hit the high temperature of 9.4 percent in June. As inflation is well above the typical target level of around 2 percent, the likelihood of a more hawkish interest rate policy triggered fears of a technical recession in the UK similar to the US, which most recently recorded two consecutive quarters of negative growth.

The BoE is expected to raise its key interest rate guidance from the current level of 1.25 percent to 1.5 percent. However, given the high inflation rate, there’s speculation that the rate hike may reach 1.75 percent. This would likely pressure consumer spending against the background of salaries that are not keeping up with the rate of inflation.

The last headline trading event this week is the US Non-Farm Payrolls (NFP) report on Friday, August 5. Now that the US is in a technical recession, any signs of weakness in the labour market may impact underlying confidence towards the USD. The NFP benchmark is expected to have fallen from 372K to 250K and any upside or downside surprises may move the USD currency pairs.

Will the NFP report for July end the last few months of a strong USD by coming in below expectations? This question is for gold traders waiting in the wings for recessionary effects to unfold in the US economy, thereby lifting support for gold-linked assets ranging from spot gold prices to gold mining stocks. If the NFP report matches or exceeds expectations, those who are bullish on gold will likely have more waiting ahead.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.