The Reserve Bank of Australia has a monetary policy announcement this evening and it is widely expected that they will raise interest rates for the sixth time since October 2009. Judging from the price action in the Australian dollar, not everyone is convinced that the RBA will deliver. The worry is that even if they raise interest rates to 4.50 percent, they could suggest that they are nearing the end of rate hikes. Whether Australian rates will reach 5 percent before all is said and done remains a question and tonight Aussie traders will be looking for answers. In many ways, what the RBA telegraphs about future rate hikes is even more important than tonight's rate hike, unless of course they do not raise rates.
The reason why the Reserve Bank of Australia's interest rate decision excites so many traders is because they are the only major central bank tampering with interest rates. For the most part, central bank watchers in other regions have been relegated to focusing on incremental changes in statements and commentary. For the RBA, actions speak louder than words. As evidence of that, the central bank has taken rates higher for an unprecedented five times out of the last six meetings. The RBA has been the outlier because the Australian economy emerged from the 'Great Recession' almost untouched; completely skirting recession while others faced one of the harshest financial storms in history. For that reason, recovery took hold early on, prompting the RBA to move before anyone else.
A few weeks before the release of Australia's inflation report, it looked doubtful that the bank would hike for the sixth time in seven months. After all, the speed in which they withdrew monetary support gave them a fair amount of flexibility to sit back and watch the implications of their actions. RBA Governor Glenn Stevens almost sealed the deal when he said that "rates are pretty close to average." Assistant Governor Debelle also said recently that "we're moving back to something around about average levels, which is not far away from where we are at the moment." Add the sovereign debt crisis in Europe to an equation that includes toned down central bank comments and there was a good chance the RBA could pause. However, with the release of the inflation numbers, which showed prices were challenging the bank's preferred inflation band, a completely sentiment emerged. In addition, the RBA's latest Minutes sharply contradicted comments from Stevens and Debelle, saying that "it might be prudent not to delay adjustments." Adding to matters was a decision by lawmakers to increase mining taxes to 40% starting in 2012. This step in the form of fiscal tightening reflects some concern that the economy has become overheated. As a result, 75% of economists polled by Bloomberg now expect yet another hike at tomorrow's meeting.