The Reserve Bank of Australia raised the cash rate by 50 basis points to 1.35 percent at its July 2022 meeting. It was the third consecutive month of rate hikes, which are now at their highest level since May 2019.
When announcing the decision on the cost of money, the central bank's board reiterated that massive monetary support was no longer needed due to the strength of the economy and current inflationary pressures. In addition, the labor market remained strong, as employment remained at its lowest level in nearly 50 years. However, policymakers cautioned that further tightening will continue in the coming months, with the size and timing dependent on incoming data and the council's views on the outlook for inflation and the labor market. The committee reaffirmed that it will do what is necessary to ensure that inflation returns to target, while noting the global outlook remains shaken by the war in Ukraine and its impact on energy and commodity prices.
Despite interest rate hikes in Australia, the AUD/USD currency pair exchange rate appears to remain at its lowest level since May 2020. We are talking about the 0.69-0.68 area, which was tested last week. The AUD's weakness may have to do with both declines in industrial commodity prices on inflation fears and the fact that the US Federal Reserve may raise interest rates faster than the RBA.
Data from the Australian economy seems to point to continued growth, but with signs of a possible slowdown. The S&P Global Australia Services PMI fell to 52.6 in June 2022 from 53.2 in May, marking the fifth consecutive month of expansion in the Australian services sector, albeit at the slowest pace in the current sequence. The expansion of Australia's service sector slowed in June. Economic activity grew at the slowest pace in five months. Although growth was supported by the reopening of Australia's borders and the loosening of COVID-19 restrictions, there was evidence that tighter financial conditions and rising costs dampened the sector's performance in June. In particular, business sentiment fell to a 26-month low, yet companies continued to increase employment levels, looking to add capacity as the economy recovers from the pandemic. Inflationary pressures remained pronounced, with price increases in labor inputs and production costs among the highest on record.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)
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