After delivering three consecutive interest rate hikes to start the year, as expected, the RBA kept the cash rate steady at 4.35% today. The decision was “unanimous” as the RBA Board steps into a “hold-and-assess phase” after recalibrating the level of interest rates to a more “restrictive” setting over Q1/Q2 2026.
According to the RBA, inflation is still “too high”, yet at the same time financial conditions have “tightened”, there are signs “growth in consumer spending is slowing”, momentum in the housing market “has shifted”, and unemployment was “higher than expected” in the recent jobs report (charts 1 and 2). It is a challenging time for policymakers, and for households/businesses across interest rate sensitive sectors.
In our judgement, after its rapid-fire recalibration the RBA is no longer chasing inflation higher, rather it is now trying to manage risks inflation becomes embedded across the economy (chart 3). The RBA notes that to ensure this doesn’t happen “growth in demand needs to slow to reduce capacity pressures”, which in turn could see unemployment move even higher over time. It can be a hard pill to swallow, but a period of sluggish growth and a weaker labour market is the price that needs to be paid to get inflation sustainably back down to target.
In the RBA’s view it will be “attentive” to the data and risks, and it “will do what it considers necessary” to achieve its objectives which includes “increasing the cash rate target further if required”. A tightening bias is in place. However, while the door to doing more is open it doesn’t necessarily mean the RBA will walk through it given the unfolding step down in growth and cracks emerging in the jobs market. In our opinion, another RBA rate rise can’t be ruled out because of underlying inflation trends but the bar to it being delivered is higher than it was. Markets seemingly agree with ~15bps of further tightening by the RBA factored into the Australian interest rate curve by next February.
The RBA might believe it has done enough for now, but it doesn’t appear confident (just yet) to think inflation is on track to get back to where it needs to be. The next quarterly Australian CPI reading (released 29 July), upcoming labour market reports (25 June and 23 July), domestic spending and housing trends, and offshore developments will be important inputs into whether the RBA moves again at the 11 August meeting (chart 4).
For the AUD (now ~$0.7045) cross-currents are in place that may keep it range bound over the near-term, in our view, without an exogenous shock washing through markets. The Northern Hemisphere summer is upon us, as is the FIFA World Cup. As our chart shows, trading activity/volatility in the AUD has historically tended to be more muted during this time of the year, especially during years when the World Cup has been on. Fundamentally, while there is a risk of another policy move down the track, the RBA does look to be closer to the end than the beginning of its tightening phase. At the same time offshore central banks are kicking things off (the ECB hiked rates last week and the BoJ moved rates up 25bps today), and expectations regarding others like the US Fed have shifted in a more ‘hawkish’ direction. We think relative yield differentials might have peaked and could be starting to turn against the AUD. This may be compounded by the lingering growth challenges faced by the local, regional and global economies from the prolonged Middle East conflict and disruptions to energy/supply-chains. Hence, while we feel the AUD should track in a higher average range compared to the past few years due to the higher level of Australian interest rates, further upside potential might be capped because of the more negative growth trajectory (chart 6).
