A rate cut is unlikely for the Reserve Bank of Australia because inflation is still higher than the 2–3% target range. Further RBA decisions are unpredictable—the market awaits the press conference after the meeting.
Key Takeaways
- The Reserve Bank of Australia's key rate is at 4.35%—its highest level in 12 years.
- The high top rate limits economic growth, increases credit card debt, and shrinks new and refinanced house credits.
- The market does not expect rates to decrease but will wait for comments on further monetary policy after the RBA meeting.
The Forex market is waiting for the decision on the key interest rate by the Reserve Bank of Australia (RBA), which is planned to be announced on 19 March. In February, the RBA had discussed a rate increase but ultimately decided to leave policy settings unchanged. The key rate of 4.35% was set in November 2023, when it was raised by 0.25% from the previous 4.10%. Since then, two RBA meetings in a row have resulted in the interest rate remaining unchanged. Economists lean towards the rate remaining unchanged at 4.35% in March, although any move is possible now.
Currently, the RBA's key rate is at its highest level in the last 12 years. The decision to raise the rate was made against inflation that followed the COVID-19 epidemic when the annual rate rose to 6.59% in 2022 from 2.86% in 2021.
The main goal of maintaining a high rate is to bring the inflation level back to the RBA's target range of 2–3%. In 2023, the annual inflation rate was 4.1%. In 2024, inflation is slowing down, and according to RBA's projections, at the end of 2024, it may be 3.2% instead of the 3.5% the central bank expected previously. However, this would still be above the target range.
High-interest rates are supposed to support the national currency. However, in the backdrop of an economic recession, the effect of this support is very moderate.
Australia's economic growth rates have been falling for the second year in a row. They fell by 5.6% (GDP, annual variation in %) in 2021, 3.8% in 2022, and 2.1% in 2023. Reducing the interest rate could boost growth—for example, by stimulating household spending.
At the same time, high-interest rates deter Australians from taking new mortgages or refinancing home loans. This volume is decreasing for the second month in a row.
The RBA must also consider data on credit card debt, which has been growing since November 2023, when the key rate was raised last. The population cannot make ends meet and is getting deeper into debt.
Since the picture of an economic recession is evident, the RBA could return the key rate to the 4.10% mark to stimulate consumer spending. This would positively affect economic growth figures but could weaken the Australian dollar. However, this is unlikely to happen on 19 March.
"According to our analysis, the RBA is expected to maintain the key rate of 4.35% amid ongoing economic challenges and inflationary pressures. This decision reflects a cautious approach to navigating economic recovery while trying to return inflation to its target range. Market participants should closely monitor the RBA's rhetoric for any hints on future monetary policy directions, as these will play a crucial role in determining the Australian dollar's direction in the near- and medium-term," Octa expert says.
So, no surge in interest rates is expected after the RBA meeting on 19 March. However, comments made at the press conference may give a push to the market. If the RBA plans to keep the cash rate at 4.35% for longer, AUD/USD may move to 0.6667, prior to 0.6728 and 0.6871. Otherwise, the Australian dollar may move to 0.6542, followed by 0.6477, and finally 0.6442.