Heads up: RBA monetary policy decision set for the bottom of the hour
The desk anticipates a hawkish shift from the RBA, likely raising the cash rate to 4.35% in response to persistent inflation pressures, as highlighted in the recent commentary from Justin Low. This move essentially reverses the brief easing cycle observed earlier in 2025, bringing rates back to levels not seen since 2011. Per the full note source, the RBA's decision comes amid rising core inflation, currently at 3.5%, and geopolitical tensions that could further complicate their policy stance. With traders pricing in an 82% probability of a rate hike today and additional hikes by September, the market is positioned for a more aggressive RBA in the near term.
What the desk is arguing
The desk frames this as a critical juncture for the RBA, as the anticipated rate hike reflects ongoing concerns about inflation that have persisted despite previous easing efforts. The RBA's cash rate adjustment back to 4.35% is a clear indication that they are not yet finished in their battle against inflation, especially with core inflation remaining above the target range of 2% to 3%.
Supporting this view, the RBA has been on a hawkish tilt since the start of the year, with inflationary pressures exacerbated by geopolitical events, particularly the US-Iran conflict that has driven energy prices higher. The commentary notes that any further hikes could push rates to levels last seen in 2008, which underscores the urgency of the RBA's situation.
Where it sits in our coverage
Our consensus target for AUD/USD sits at 1.075, with a range from 1.04 to 1.12. Notably, jpmorgan has set a target of 1.10 for March 2026, while bofa is more conservative with a target of 1.04 for the same period.
This view aligns with the broader market sentiment, as the desk's call is positioned at the upper bound of the consensus range, suggesting a more aggressive outlook compared to some firms that remain cautious.
How other firms see it
Firms aligned with a hawkish stance include jpmorgan and citi, both anticipating further rate increases from the RBA. In contrast, bofa and deutsche bank express a more cautious outlook, suggesting that the RBA may need to pause to assess the economic impact of rising rates.
Watch the AUD/USD trajectory closely, as it will likely reflect the RBA's policy decisions and the evolving inflation landscape. Additionally, the interplay between the RBA and the US Federal Reserve will be critical in shaping market expectations.
What the calendar says
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Key takeaways
- 01RBA expected to raise cash rate to 4.35%, reversing previous easing.
- 02Core inflation remains elevated at 3.5%, complicating RBA's policy decisions.
- 03Traders pricing in ~82% odds of a rate hike today, with further hikes expected by September.
- 04Geopolitical tensions add uncertainty to the economic outlook.
Market implications
Traders should monitor the AUD/USD level closely, particularly if the RBA signals a pause after today's hike. The market's reaction to the RBA's communication will be crucial in determining the trajectory of the Australian dollar in the coming weeks.
In bringing the cash rate back to 4.35%, the RBA will have essentially reversed its brief easing cycle in 2025. This will then bring interest rates back to the recent peak levels seen during 2024, which followed from rate hikes during 2022 to 2023. So much for being done with the battle against inflation, eh?
Any further rate hikes after today will see the cash rate move back to levels last seen during 2011. And if it does hit the 5% threshold, that will be the highest since 2008. Given that backdrop, it is going to be a very tricky situation for the RBA in communicating their next steps and how they are viewing the balance between high rates and the economic outlook.
But for now, it's all about taking things one step at a time. As a reminder, the RBA has already been on a hawkish tilt since the turn of the year with core inflation keeping well above their target band of 2% to 3%. The latest trimmed mean reading sits at 3.5% and policymakers were already worried about inflation pressures getting out of hand before the war.
So when you add in the impact of higher energy prices from the US-Iran conflict, it just adds upside risks to the whole picture. That being said, the war also complicates things a fair bit. And it's not just for the RBA, but for all major central banks.
There's a fine balance to be struck and it may be prudent to buy as much time as possible in waiting for more clarity. That especially since there is still no end to the conflict and the Strait of Hormuz situation remains as it is for over two months now. As such, it may be possible for the RBA to switch up their language a little today.
After delivering another 25 bps rate hike, the central bank could lean towards signaling a pause in wanting to gather more certainty from Middle East developments. However, expect them to communicate that they will maintain optionality and flexibility to act again if needed in the months ahead. That especially since they will bring interest rates back to a more restrictive level and give themselves some legroom to work with.
The only question is, will that be enough considering an already more inflationary backdrop prior to the war and now having to factor in the potential risks of second round effects? There's value in waiting but there's also great risk in waiting too long. But compared to other major central banks, perhaps not being able to cut interest rates as much previously was a blessing in disguise.
That being said, it may end up being a double-edged sword if they're not careful in dealing with the latest situation. As things stand, traders are pricing in ~82% odds of a rate hike today with a second 25 bps rate hike priced in by September. By year-end, there's a total of ~60 bps of rate hikes priced in for the RBA.
Sources & References
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