As expected, the Reserve Bank of Australia left its Cash Rate unchanged this morning at 3.6%. Until recently, most economists, including myself, had expected a cut in November. However, last week's inflation figures showed that the inflation problem is more serious than expected. Due to expiring subsidies, a rise in inflation was expected, Commerzbank's FX analyst Volkmar Baur notes.

AUD is likely to continue struggling

"However, no one anticipated that it would exceed the upper end of the central bank's target range with 3.2% yoy. Even more important was probably the fact that the rise in inflation was broader and not solely attributable to special effects. The trimmed mean inflation rate, which adjusts the overall rate for statistical outliers, also rose to 3.0%, significantly higher than the central bank had expected in August (2.6%)."

"As mentioned, the market had already anticipated an unchanged key interest rate since the last inflation figures. Since then, however, the AUD has not gained against the US dollar, as might be expected with sustainably higher interest rates, but has fallen by around 1.5%. This is likely due to the unexpected rise in inflation overcompensating for interest rate expectations."

"We assume that higher inflation, if it was not an outlier in Q3, will continue to weigh on the AUD. Even an early end to the interest rate cycle by the RBA would only provide temporary support for the AUD, as further interest rate cuts were not expected anyway. As long as the Australian economy remains trapped in an environment of weak growth and elevated inflation, the AUD will continue to struggle."