RBA expected to hold interest rate at 4.35% as markets reassess hike bets
The Reserve Bank of Australia (RBA) is on track to keep the Official Cash Rate (OCR) steady at 4.35% for the second consecutive meeting on Tuesday.
The decision will be announced at 04:30 GMT, accompanied by the Monetary Policy Statement (MPS) and updated economic forecasts. RBA Governor Michele Bullock’s press conference will follow at 05:30 GMT.
The Australian Dollar (AUD) is set to experience volatility around the RBA policy announcement and Bullock’s press conference, with markets focused less on the widely expected hold and more on signals about the central bank’s next policy move, as softer-than-expected inflation data could cloud the central bank’s outlook on interest rates.
RBA set for another pause, what’s next?
While markets had previously priced in the possibility of another rate hike in August, expectations have shifted dramatically following a softer-than-expected second-quarter (Q2) inflation report, reducing the urgency for the RBA to tighten policy again.
The turning point came with Australia’s latest Consumer Price Index (CPI) report, which showed underlying inflation slowing more than expected.
The RBA’s preferred Trimmed Mean CPI rose 0.8% quarter-on-quarter (QoQ) in the second quarter, below market expectations for a 0.9% increase. Annual Trimmed Mean inflation accelerated only modestly to 3.6% from 3.5%, remaining below the central bank’s own 3.8% forecast.
Following the CPI release, Bloomberg data showed that the implied probability of a rate hike in August collapsed to just 4%, down from more than 20% before the data.
Expectations for a fourth rate hike later this year also receded sharply, with market pricing falling below 50%, compared with roughly 84% pre-data release.
This swift repricing suggests markets increasingly believe the RBA has room to remain patient, while assessing whether recent signs of easing inflation are sufficient to pause the tightening cycle.
Even though headline inflation benefited from lower fuel prices during June, Oil prices moved higher again after a renewed outbreak of conflict involving Iran during July.
Additionally, Australia’s temporary fuel excise discount expired on August 2, removing a temporary source of downward pressure on fuel prices and potentially adding fresh upside risks for inflation in the months ahead.
Against this backdrop, the RBA is likely to adopt a cautious tone, maintaining a data-dependent approach, as policymakers continue to balance slowing economic momentum against still-elevated price pressures.
Additionally, the RBA could consider the updated inflation and growth forecasts and whether the likely reopening of the Strait of Hormuz is enough to calm inflation concerns and to signal a pause in the current tightening cycle.
RBA seen on hold as summer lull keeps focus on data
Analysts at Rabobank note that attention turns to Australia on Tuesday, when “the Reserve Bank of Australia sets rates.” They acknowledge that they are “not entirely convinced that the three hikes delivered since the start of the year are enough to mop up excess demand in the Australian economy, but the RBA seems to hope it is.” Even so, Rabobank expects policymakers to “hold rates unchanged this week,” a view they point out is shared by “all other 31 economists surveyed by Bloomberg.” More broadly, the bank highlights that “it’s peak summer, with a light data calendar and most central bankers on holiday,” adding that “the Fed’s Hammack is an exception.”
How will the Reserve Bank of Australia’s decision impact AUD/USD?
The AUD is hanging close to seven-week highs against the US Dollar (USD) ahead of Tuesday’s RBA policy announcements.
With a rate hold largely priced in, the policy statement and updated forecasts, alongside Governor Bullock’s message, will likely matter more than the rate decision itself.
If Bullock and the MPS acknowledge softer inflation while emphasizing patience and data dependence, that could reinforce expectations that interest rates have peaked, potentially weighing on the Aussie Dollar and the AUD/USD pair.
Alternatively, if inflation forecasts are revised higher, followed by Bullock’s still concerning remarks on inflation, it could leave further rate hikes on the table, providing fresh support to AUD/USD.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, highlights key technical levels for trading AUD/USD following the policy announcement.
“The Aussie pair trades firmly above the short- and medium-term moving averages. The 21-day and 50-day Simple Moving Averages (SMAs) bullish crossover underpins the advance, while the 200-day SMA at 0.6926 reinforces the broader bullish structure. The Relative Strength Index (RSI) near 60 leans higher but remains shy of overbought territory, suggesting upside momentum remains constructive on the daily chart.”
“On the topside, immediate resistance is located at the 0.7100 round level, which could act as the next pivot for trend continuation. Further up, the June 5 high near 0.7145 could be tested. On the downside, initial support is seen around 0.7000, the confluence zone of the 21-day SMA and 50-day SMA. Below that, the 200-day SMA at 0.6926 could act as a deeper line of defense,” Dhwani adds.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
