Westpac sees upside inflation risks after RBA lifts cash rate to 4.35% in 8-1 vote
At a Glance
The desk sees the RBA's recent rate hike as a signal of persistent inflation pressures, particularly influenced by geopolitical factors. Per the full note source, the RBA raised its cash rate by 25 basis points to 4.35%, with an 8-1 vote reflecting a stronger consensus than the previous meeting. However, the dovish tone from Governor Bullock suggests that while further tightening is possible, the June meeting could see a pause. This nuanced stance is critical as it indicates a balancing act between combating inflation and acknowledging potential economic headwinds.
Full Analysis
What the desk is arguing
The desk interprets the RBA's decision to raise the cash rate as indicative of ongoing inflationary pressures, particularly those stemming from the Middle East conflict. The RBA's acknowledgment of second-round effects on prices underscores the urgency of addressing inflation, despite Governor Bullock's cautious outlook during the press conference. Per the full note source, Westpac's analysis suggests that while the RBA's forecasts imply further tightening, the dovish tone may lead to a pause in June.
Supporting this view, the RBA's trimmed mean inflation forecast is projected to peak at 3.8% in Q2, with Westpac's more hawkish outlook anticipating a peak of 4% through the remainder of 2026. This divergence highlights the potential for upside inflation risks, particularly if oil prices do not retreat to the RBA's optimistic assumption of USD80 per barrel by year-end.
The alternative read would be that the RBA's decision reflects a more stable economic outlook, allowing for a less aggressive tightening cycle. However, the current geopolitical climate and its impact on inflation complicate this narrative significantly.
Where it sits in our coverage
Our consensus target for AUD/USD is 1.075, with a range from 1.04 to 1.12. Specific firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26)
This view aligns with jpmorgan's target but diverges from bofa's more cautious stance, which sits at the lower end of the range. The desk's outlook suggests a potential for further appreciation in AUD/USD if inflation pressures persist, indicating a more aggressive tightening cycle than currently anticipated by some firms.
How other firms see it
Firms like jpmorgan and citi are aligned with the desk's view, anticipating further rate hikes in response to inflationary pressures. Conversely, bofa maintains a more conservative outlook, suggesting a pause in tightening could be warranted given the economic headwinds.
Watch the AUD/USD trajectory closely, as it will be influenced by the RBA's upcoming decisions and the evolving inflation landscape. Additionally, the interplay between the RBA's policy and the Fed's decisions could create volatility in this currency pair.
What the calendar says
The next RBA meeting is scheduled for June 15-16, which will be pivotal in determining the trajectory of monetary policy and could influence market positioning significantly ahead of this event.
From the original
The RBA raised its cash rate 25bps to 4.35% in an 8-1 vote, citing Middle East inflation pressures, but Westpac sees the June move as more finely balanced after Governor Bullock's dovish tone. Summary: The RBA Monetary Policy Board raised the cash rate by 25 basis points to 4.35%
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CBA sees RBA on hold for rest of 2026 after third consecutive hike to 4.35%
The desk anticipates that the Reserve Bank of Australia (RBA) will maintain its cash rate at 4.35% for the remainder of 2026, with potential rate cuts beginning in 2027. This outlook is supported by Commonwealth Bank's recent analysis, which highlights inflation concerns and a downgraded GDP forecast. Per the full note [source], the RBA's decision to raise rates for the third consecutive time reflects a cautious approach to monitoring economic developments, particularly in light of inflationary pressures stemming from energy costs. The desk notes that the market's current pricing may not fully reflect the potential for an August rate hike if inflation data surprises to the upside.