RBA Interest Rate Decision: The End of Optimism?

After the last RBA meeting, there was a bullish outlook for the AUD. The Reserve Bank upgraded its targets and brought forward their guidance for when rates might lift off. The economy looked like it was back on solid footing after the lockdowns had been lifted.

Now, most of the headlines going into the RBA meeting are talking about the threat from the omicron variant. That said, the Reserve Bank might have a more cautious outlook and tone down some of the optimism following the last meeting.

The fact that Australia confirmed its first case of community spread of omicron didn’t help matters. Nonetheless, just because the press is talking a lot about it, that doesn’t mean it’s what the RBA will be most focused on.

To lockdown or not to lockdown

The main issue with a resurgence of a new variant, of course, is whether it will cause a new round of lockdowns.

However, that’s not a monetary policy decision. The RBA is likely to focus on the underlying data, and not try to pre-guess what the state authorities will do. So far, both Victoria and ACT premiers have insisted that they won’t go into lockdown again.

To be sure, the RBA can hedge potential uncertainty. However, by providing a pessimistic view ahead of the summer, they could actually hurt the economic outlook and contradict their efforts to support growth.

If the RBA is worried about the possibility of another economic hit, that could keep investors on hold, and cause an economic hit. Without any concrete measures regarding omicron, there is good reason for the RBA to stay on course.

What to expect

There is a unanimous agreement among analysts that the RBA will keep its policy unchanged at the upcoming meeting. Any potential impact to the markets will likely come from any changes in the language regarding the outlook.

However, the RBA just recently updated their projections at the last meeting. And there is a consensus that they will likely wait to see the impact. Without a press conference scheduled for after the meeting, there is little chance that any questions could rile up the markets as well.

In other words, everything is pointing to the meeting being a non-event. That is except with all the commentary about the new variant there might have been some pre-adjustment in the market.

So, an across-the-board affirmation of the outlook by the RBA might provide a little bit of a boost for the AUD, as it would help calm some of the uncertainty.

Where could the AUD go?

The RBA’s likelihood to keep things on hold doesn’t mean the AUD is out of the woods. The general loss of risk sentiment, combined with an expectation that central banks aren’t about to change their guidance, is likely to keep weighing on commodity currencies.

A weaker AUD also contributes to higher inflation in the country. And that’s a further reason for the RBA to keep its outlook steady.

Even if it doesn’t play a role in the RBA meeting, omicron is likely to keep being the major factor driving the Aussie. Any positivity we get out of the monetary policy decision could quickly evaporate if there are further negative headlines on the virus front.

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