Westpac sees upside inflation risks after RBA lifts cash rate to 4.35% in 8-1 vote
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.
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.
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% at its May 2026 meeting in an 8-1 vote, up from a 5-4 split in March, according to Westpac's analysis of the decision The board cited higher inflation stemming from the Middle East conflict, including second-round effects on goods and services prices, with risks skewed to the upside, per the Westpac note Westpac still expects further tightening this year but views a June hike as more finely balanced following Governor Bullock's relatively dovish press conference remarks, according to the bank The RBA's own forecasts show trimmed mean inflation peaking at 3.8% in Q2 and not returning to the 2.5% midpoint until June 2028, based on an oil price assumption of USD80/bbl by year-end, per the Westpac analysis Westpac's own forecasts are more hawkish, projecting trimmed mean inflation peaking at 4% and remaining there through the rest of 2026, according to the note The revised RBA forecasts point to softer GDP, consumption and business investment, with labour market weakness expected to emerge with a lag, per Westpac The Reserve Bank of Australia lifted its cash rate by 25 basis points to 4.35% at its May 2026 board meeting, a decision that drew near-unanimous support from the Monetary Policy Board in an 8-1 vote, a considerably stronger consensus than the 5-4 split that delivered the previous hike in March. The board pointed to inflationary pressures amplified by the Middle East conflict, including the risk of second-round effects flowing through from higher fuel costs into the broader prices of goods and services.
That dynamic compounded what the RBA already viewed as capacity-driven inflation pressures within the domestic economy, with risks assessed as tilted to the upside. Despite the decisive vote, analysts at Westpac flagged a notable divergence between the hawkish implications of the RBA's staff forecasts and the more measured tone struck by Governor Michele Bullock at her post-meeting press conference . Bullock framed the three rate rises delivered so far as addressing the inflation problem that pre-dated the Middle East conflict, and suggested this created room for the board to monitor how conditions evolved before acting again.
Westpac interpreted that language as leaving a June pause more firmly on the table than the bank had previously expected. The RBA's own inflation projections show trimmed mean inflation peaking at 3.8% in the second quarter before gradually moderating, with the 2.5% midpoint of the target band not reached until June 2028. Those forecasts rest on an assumption that oil futures track back to USD80 per barrel by year-end, a level Westpac viewed as potentially optimistic given its own read of near-term price pressures.
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