RBA Considers Pause on Tightening Policy, While Global Banking Turmoil Supports Gold Prices

The Reserve Bank of Australia may pause its policy tightening cycle in April, citing an uncertain economic outlook and high inflation.

By Ahmed Azzam | @3zzamous | 21 March 2023

  • Reserve Bank of Australia to consider pausing policy tightening cycle in April

  • Gold prices remain steady, supported by global banking turmoil and Federal Reserve's efforts

  • Investors closely watching Canada's CPI reading, expected to show a year-on-year slowdown from 5.9% to 5.4%

What’s happened in the markets?

According to minutes from the Reserve Bank of Australia's March meeting, the central bank will consider pausing its policy tightening cycle in April. The minutes noted that monetary policy in the country was already restrictive, and with an uncertain economic outlook and high inflation, a pause would allow for additional time to reassess the situation. Although headline inflation was expected to have peaked, it was not expected to return to the target range until mid-2025, while core inflation remained high. The central bank recognized the cumulative impact of the significant interest rate increases since May 2022 and the lags in the effect of monetary policy. The upcoming meeting will take into consideration employment, inflation, retail, and global economic developments.

What to watch?

In an effort to increase dollar liquidity, the Federal Reserve offered daily currency swaps to several central banks, including the Bank of Canada, Bank of England, Bank of Japan, European Central Bank, and Swiss National Bank. As a result, gold prices held steady at around $1,980 per ounce on Tuesday, near the one-year high it reached in the previous session. The recent global banking turmoil has led to expectations that the Federal Reserve will take a more measured approach to tightening policy this week. Analysts predict a moderate 25 basis point rate hike, with some even suggesting a pause. The crisis, which began with the collapse of Silicon Valley Bank and Signature Bank in the US and was followed by the forced takeover of Credit Suisse by UBS in Europe, prompted regulators and major banks to intervene and stabilize markets. These events have supported gold prices.

The dollar index remained below 103.5, close to its lowest level in five weeks. This comes as the market expects the Federal Reserve to adopt a more cautious approach to interest rates in its decision on Wednesday, potentially impacting the value of the dollar.

Investors are eagerly anticipating the release of Canada's CPI reading during today's trading session. The inflation figure is expected to show a year-on-year slowdown from 5.9% to 5.4%, and the market is paying close attention to the outcome.