The Reserve Bank of Australia officially raised the interest rate by 25 bps to 3.6 percent on Tuesday (07/March). This decision brought the RBA's benchmark interest rate to a more than 10-year high. 

If it is accumulated since the beginning of policy tightening at the start of last year, the total interest rate hike by the Australian central bank has reached 350 bps so far. 

RBA Governor, Philip Lowe, said that inflation in general is still at a high level. Although it has begun to show signs of decline in recent times, the inflation level has only remained near the 30-year high. 

This is what underlies the RBA's decision to continue raising their rates. Lowe noted that services inflation in Australia is still relatively high because it is triggered by rising rental prices.

Australia Economy will still Difficult Further

Meanwhile, rising prices of goods are expected to grow moderately in the next few months. He asserted that inflation is likely to return to its 2-3 percent target by mid-2025 

Going forward, Lowe said that the RBA will continue to adopt a data-driven approach to determine the direction of monetary policy. He also predicted that the Australian economy will find it difficult to achieve the expected soft landing. 

In this regard, Lowe warned that the future economic growth outlook will be below the trend over the next few udara. It is due to the impact of high interest rates. 

However, he is optimistic that the labor market will remain tight with the current unemployment rate near a 50-year low. This thoughts are also agreed by other market analysts. 

AUD/USD Slumps, Trade Balance Disappoints

Broadly speaking, the RBA's interest rate announcement this time has been anticipated. That is why; it does not provide any significant surprises. 

AUD/USD actually fell up to 0.42 percent at 0.6700 after the policy release. The decline in the Australian Dollar is likely due to previously released economic data. 

Australia's trade balance shrank beyond expectations in January. This is as China's economic recovery (Australia's biggest trading partner) worries early in 2023.

The US dollar index or it is also known as dxy posted a daily gain of nearly 1% to a high of 105.35. It can be seen in the middle of Tuesday's New York session (7/March). 

The Fed is Ready for an Aggressive Rate hike

The Greenback's rally was spurred by Federal Reserve Chairman Jerome Powell's hawkish testimony, thus knocking out the rates of other currencies. AUD/USD plunged freely by almost 2% to the range of 0.6600.

Mean while, GBP/USD fell by 1.3% to a range of 1.1865. EUR/USD and NZD/USD each fell by more than 1%. USD/JPY strengthens by 0.6%, while USD/CAD hits highest level since October 2022.

Jerome Powell acknowledged that the pace of inflation has slowed in certain sectors such as housing. But the rate of inflation in other most important sectors remains high, especially in the service sector. 

Therefore, he argues that monetary policy must remain tight. The latest economic data comes in stronger than expected, which suggests that the final interest rate is likely to be higher than previously anticipated.

Powell’s Statement Brings 2 Gestures 

He stated that If overall data suggests that a faster (monetary) tightening is necessary, they will be prepared to increase the pace of rate hikes. It is also anticipated by market participants. 

Powell's statement carried two gestures. First, terminal interest rates are likely to be higher than previously expected by Fed officials. Second, the Fed is likely to raise interest rates by more than 25 basis points.

It can be done at the upcoming FOMC meeting if inflation data remains high. Fed officials in the December 2022 FOMC meeting issued a dot plot scheme that projects the terminal interest rate at 5.1%.