Ahead of Australia's federal election, a number of politicians want to review the central bank's mandate. This review has the potential to trigger a faster rate hike.
New surprises await Australian dollar traders this year. Australian Finance Minister Josh Frydenburg told the Australian Financial Review that his Liberal party would conduct an independent review of the RBA's monetary policy mandate if it wins federal elections in the coming months. Similar comments have also been made by his opponent, the Labor party.
Australian Dollar Potentially More Bullish
One of the focuses of the review is likely to be the inflation target. Exactly, does Australia's central bank (RBA) need to revise its inflation target to align with other major central banks such as the RBNZ, BoC and BoE?
"One potential area of discussion is the RBA's inflation target of 2-3% (with an effective midpoint of 2.5%). That target is 0.5% higher than all of its peers' targets," said Greg Anderson at BMO Capital Markets.
If the review of the RBA's mandate has implications for lowering the inflation target, the obstacles for the RBA to raise interest rates are reduced. Consequently, the projection of the Australian dollar exchange rate this year has the potential to be more bullish.
A review of the RBA's mandate may also focus on property pricing issues. Australian housing prices have "heated up" to become one of the most "hot" topics in local political debate. A number of RBA officials have acknowledged that its interest rate policy has indeed resulted in an increase in housing prices - as well as a lack of adequate housing supply in some parts of Australia -.
If Australian politicians choose to pass the responsibility for "cooling down" the property market to the central bank, the RBA will likely be forced to raise interest rates more quickly. This is also potentially bullish for the AUD, as the RBA's current policy guidance hints at the slowest rate hike possible compared to other major central banks.
The movement of the Australian dollar exchange rate has not responded to the discourse of reviewing the RBA's mandate. There have been no concrete details from the competent authorities, so speculation is likely to continue until after the Australian federal election which could potentially be held on or before 21 May 2022.
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