RBA Hikes Official Cash Rate in June, Joins Global Hawks
The Reserve Bank of Australia (RBA) is the latest central bank to hike its key interest rate guidance and join the global hawks after the Reserve Bank of New Zealand (RBNZ) raised its rate from 1.5 percent to 2 percent at the end of May.
The RBA increased its official cash rate (OCR) by 0.5 percent, higher than the expected 0.35 percent. The surprise triggered movement in the AUDUSD pair which took the spotlight with a hawkish rivalry that could set the tone for the short-to-medium term. Inflation in Australia rose to 3.75 percent in March, prompting the RBA to drop its rhetoric about patience and switch to action.
Investors and traders tend to dislike surprises and the RBA’s stance may send ripples of nerves through Asian markets which are already prone to bearish trends because of global recession fears and geopolitical stressors stemming from Ukraine. Higher interest rates in the banking sector may defuse inflation, but they also dampen investment across the economy because access to loans is more expensive. The ASX pointed downwards in pre-market trading at the time of writing.
One of the main drivers of uncertainty is crude oil. Spot crude oil prices have shown few signs of slowing their climb, pressuring economic sectors from manufacturing to travel. Provided that the COVID-19 pandemic fades, global economic activity should keep growing along with demand for fuel.
Gold spot prices began moving upwards in the second week of June after a relative plateau during May, possibly linked to the recent weakness seen in the USD. This could change next week, depending on the Federal Reserve’s interest rate decision. The US central bank is expected to hike its key interest rate guidance by 0.5 percent in June and July before a possible pause in September.
The NFP report showed that the US added 390K jobs in May, meaning that the Federal Reserve could see a case for raising its key rate by more than 0.5 percent in June. The inflation rate is after all at 8.1 percent at the last count, and growth fears due to the pandemic and the conflict in Ukraine are the only things holding the central bank from becoming even more hawkish.
What is the RBA’s official cash rate (OCR)?
The OCR is the RBA's key interest rate guidance to the banking sector. Central banks guide the banking and broader financial sectors with their key interest rates on overnight loans between banks. When the RBA's cash rate is in positive territory, banks earn more on overnight loans to other banks. They also earn more on loans to retail customers and offer higher interest rates on savings deposits. The OCR guides a number of interest-related financial products like bonds, savings accounts, business loans and mortgages.
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