The Australian dollar is the best performer among the major currencies in a quiet startHe is Sunnah. The Australian dollar is up about 0.5% against the US dollar on the daily chart, so far, supported by positive market sentiment and growing hopes that the next move by the Reserve Bank of Australia (RBA) will be to raise interest rates.
RBA Governor Michael Bullock’s hawkish comments after the December 9 monetary policy decision, and the meeting minutes, reveal that policymakers’ concerns about inflation have taken center stage, and that the possibility of a rate hike was on the table last month.
Consumer inflation accelerated to an annual pace of 3.8% in October, from 3.6% in September and 3.2% in August. The November inflation report is due next week, and wage growth figures suggest that price pressures may continue to grow. If this is the case, bets on an upcoming rate hike from the Reserve Bank of Australia will likely support a rally in the Australian dollar.
In the United States, by contrast, the Fed is still halfway through its easing cycle. Recent US data has been somewhat positive, including weekly unemployment claims numbers on Wednesday, but that will not stop US President Donald Trump from replacing Chairman Jerome Powell with a dovish partisan at the end of his term in May.
Trading volumes remained weak on Friday, with markets in Japan and China closed for New Year celebrations. The only event worth noting is the release of the S&P Global Manufacturing PMI in the US, which is expected to confirm that the sector’s business activity fell to 51.8 in December from 52.2 in November, still at levels consistent with moderate activity growth.
(This story was corrected on January 2 at 08:00 GMT to say US S&P Global Manufacturing PMI, not we Global Marketing Purchasing Managers’ Index (S&P), As stated previously)
Frequently asked questions for central banks
Central banks have the main task of ensuring that prices in a country or region are stable. Economies constantly experience inflation or deflation when the prices of certain goods and services fluctuate. A continuous rise in prices for the same goods means inflation, and a continuous fall in prices for the same goods means deflation. It is the responsibility of the central bank to maintain demand by adjusting the interest rate. For the largest central banks such as the US Federal Reserve (Fed), the European Central Bank (ECB), or the Bank of England (BoE), the mandate is to keep inflation near 2%.
The central bank has one important tool at its disposal to raise or lower inflation, and that is by adjusting its benchmark interest rate, known as the cash rate. At the moments announced in advance, the central bank will issue a statement on its interest rate and provide additional reasons as to why it will remain or change (lower or raise). Local banks will adjust their savings and lending rates accordingly, which will make it harder or easier for people to earn their savings or for companies to get loans and make investments in their businesses. When a central bank raises interest rates significantly, this is called monetary tightening. When the benchmark interest rate is lowered, it is called monetary easing.
The central bank is often politically independent. Members of the central bank’s policy board go through a series of committees and hearings before being appointed to a policy board seat. Each member of this board often has a certain conviction about how the central bank should control inflation and subsequent monetary policy. Members who want very loose monetary policy, with low interest rates and cheap lending, to boost the economy significantly while being content to see inflation just above 2%, are called “doves.” Members who want to see higher interest rates to reward savings and want to keep inflation down at all times are called “hawks” and will not rest until inflation reaches 2% or just below.
Typically, there is a chair or chair who presides over each meeting, needs to create consensus among the hawks or doves, and has the final say when it comes to dividing the votes to avoid a 50-50 tie on whether the current policy should be amended. The Chairman will often make live follow-up speeches, communicating the current cash position and outlook. The central bank will try to push its monetary policy forward without causing violent fluctuations in interest rates, stocks, or its currency. All central bank members will direct their stance towards the markets before the policy meeting. A few days before the policy meeting and until the new policy is announced, members are prohibited from speaking publicly. This is called a blackout period.
