Aussie steady as RBA holds pat

As expected, the RBA maintained its cash rate at a record low 0.10% earlier on Tuesday. In the rate statement, Governor Philip Lowe said that the global economy continued to improve, but noted that the war in Ukraine was “a major new source of uncertainty”.  Lowe warned that inflation would continue to rise and that the RBA was projecting inflation to hit 3.25% in the coming quarters.  This is significant because it indicates that the central bank expects inflation to rise above the bank’s 2-3% target band.

Lowe has consistently said that he will not lift rates until inflation was “sustainably” within the target band. This provides Lowe with plenty of wiggle room, as even if inflation remains above 3%, he can decide when that is deemed ‘sustainable’.  So when can we expect a rate hike? June is certainly a possibility, but the unfolding crisis in Ukraine will likely disrupt the global recovery and could put a dent in the plans of central banks to raise rates.  Lowe referred to the Ukraine war in today’s rate statement and he could use the crisis to justify holding off on tightening policy.

In the financial markets, risk appetite remains subdued, but there appears to be less pessimism than we saw over the past several days. This could be based on the notion that investors feel that the bulk of the West’s sanctions against Moscow has already been announced and the markets have had a chance to digest these moves. Still, I expect that risk sentiment and market direction could quickly change, based on developments on the ground in Ukraine. As well, Russia will not take these sanctions lying down, and its response could dampen risk sentiment.

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AUD/USD Technical

• There is resistance at 0.7313 and 0.7393
• AUD/USD has support at 0.7124 and 0.7015

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