RBA SMoP: Drastically revised up forecasts for inflation, AUD/USD dips below 0.7100

The Reserve Bank of Australia's Statement on Monetary Policy has been released and traders are looking for an update to its forecasts and more detail surrounding the RBA’s views on the risks to the economic outlook.

The RBA has drastically revised up forecasts for inflation, foreshadowing how far interest rates might have to rise to bring the country's cost of living crisis under control.

''In its quarterly statement on monetary policy, the Reserve Bank of Australia (RBA) warned core inflation could now hit 4.6% by December, a startling two percentage points higher than its previous forecast made in February.

That would be well above the RBA's 2-3% target band and inflation was only seen returning to the top of the band by mid- 2024, suggesting a lengthy tightening cycle was in store,'' Reuters reported. 

Key notes

On monetary policy: Further increases in interest rates needed to restrain inflation.

RBA sharply raises inflation forecasts, sees core inflation above 2-3% band until 2024.

RBA says appropriate to start normalising interest rates.

RBA says inflation pressures broadening due to supply chain bottlenecks, strong demand.

RBA says more firms expect materially higher wage costs, difficulty in finding workers.

RBA says economy has been more resilient than expected, nearer to full employment.

RBA forecasts trimmed mean inflation at 4.6% dec 2022, 3.1% dec 2023, 2.9% june 2024.

RBA forecasts cpi inflation at 5.9% dec 2022, 3.1% dec 2023, 2.9% june 2024.

RBA forecasts unemployment 3.7% dec 2022, 3.6% dec 2023, 3.6% june 2024.

RBA forecasts wage growth 3.0% dec 2022, 3.5% dec 2023, 3.7% june 2024

RBA forecasts gdp growth 4.2% dec 2022, 2.0% dec 2023, 2.0% june 2024.

RBA forecasts assume cash rate of 1.75% Dec 2022, 2.5% Dec 2023.

RBA says outlook for business/govt investment positive but constrained by capacity, supply chains.

RBA says Australia terms of trade to reach new peak in mid-2022, stay high for longer.

RBA says Australian dollar around where it was at start of year despite recent fall.

AUD/USD update

Meanwhile, despite that firth rate increases, are needed, the Aussie has been offered below 0.7100:

The wheels are set in motion for lower levels should the support give out. There is a vacuum in the price imbalance between 0.7077 to 0.7045 that could be filled in the forthcoming hours. 

About the RBA's SMoP

The RBA Monetary Policy Statement released by the Reserve bank of Australia reviews economic and financial conditions, determines the appropriate stance of monetary policy and assesses the risks to its long-run goals of price stability and sustainable economic growth. It is considered as a clear guide to the future RBA interest rate policy. Any changes in this report affect the AUD volatility. If the RBA statement shows a hawkish outlook, that is seen as positive (or bullish) for the AUD, while a dovish outlook is seen as negatvie (or bearish).