Today the Reserve Bank of Australia Governor Philip Lowe spoke about inflation and monetary policy. 

He has greater control than anybody else over the value of the country’s currency since he is the head of the central bank, which regulates short-term interest rates.

His public appearances are closely watched by traders because they frequently contain subliminal hints about upcoming monetary policy;

Here are the key highlights;

• CPI inflation has climbed to 6.1% and underlying inflation to 4.9%.The RBA’s job is to use the tools and responsibilities of a central bank to help Australians maximize their economic well-being.
• The RBA was an early proponent of flexible inflation targeting, rejecting the harsher versions of inflation targeting that were popular in the 1990s.
• Flexible inflation targeting has been beneficial to Australia and remains the best monetary policy regime for the country.
• The current surge in inflation is only temporary, and the country will soon return to the 2 to 3% range.
• The Board is committed to bringing inflation back to target.

He then highlights three sources of uncertainty

• Global economic environment
• Domestic in nature, this is how Australian inflation expectations and inflation psychology adjust to a period of high inflation.
• How households react to rising interest rates For the first time in 12 years, interest rates are rising, and they are increasing rapidly. The full ramifications of this have yet to be felt.

He notes;

“We are paying close attention to these various uncertainties, but also recognise that there have been a number of developments that should prove helpful in navigating the narrow path.”

It is also worth noting that inflation expectations in Australia are still in line with the inflation target. Furthermore, wage growth has increased, but not to the same extent as in the United States. 

The Board has raised the cash rate target by a total of 214 percentage points since May, including a 12 percentage point increase earlier this week .

This rise in interest rates from a historically low level is intended to ensure that the current period of high inflation is only transitory and that a more sustainable balance between demand and supply is established.

He concludes;

“The Board expects that further increases in interest rates will be required over the months ahead. ……………..but how high interest rates need to go and how quickly we get there will be guided by the incoming data and the evolving outlook for inflation and the labor market.”

Other Important Updates Expected Today

Natural Gas Storage – USD

The Natural Gas Storage Indicator is a national and regional estimate of the working natural gas volumes held in underground storage facilities by the U.S. Energy Information Administration (EIA).

Change in the amount of natural gas stored underground over the last week in cubic feet. When there is a lack of supply or when demand is rising, the inventories are used to keep prices stable.

Crude Oil Inventories – USD

The amount of commercial crude oil that US businesses are holding is tracked weekly by the Energy Information Administration’s (EIA) Crude Oil Inventories. Inflation may be affected by the price of petroleum products, which is influenced by the amount of inventories.

It serves as the main indicator of market supply and demand imbalances, which can change production levels and increase price volatility.

Crude prices will decline if the increase in inventories is greater than anticipated because it suggests weaker demand. The same holds true if an inventory decline is less pronounced than anticipated.

Crude prices will rise if the increase in crude is less than anticipated because it suggests higher demand. The same holds true if an unexpectedly large decline in inventories occurs.

Main Refinancing Rate – EUR

The main refinancing rate, also known as the minimum bid rate, is the interest rate that banks must pay when borrowing money from the ECB. Banks do this when they are low on liquid assets.

Interbank interest rates react strongly to changes in the ECB refinancing rate. Short-term interest rates are the most important factor in currency valuation; most other indicators are merely used to forecast how rates will change in the future.

Monetary Policy Statement – EUR

The European Central Bank Monetary Policy Statement includes the outcome of the ECB’s asset purchase decision as well as commentary on the economic conditions that influenced their decision. It is the primary tool used by the ECB to communicate the monetary policy to investors.

It includes the result of their choice regarding interest rates as well as an analysis of the economic factors that affected their choice. Most importantly, it covers the state of the economy and provides information on how decisions will pan out in the future.

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