Reserve Bank of Australia holds steady, and its tone remains even-handed

The Reserve Bank of Australia left rates unchanged at 4.35%, viewing inflation as sticky but broadly in line with its base case. This allows policy to remain restrictive and data dependent. While risks persist, easing global pressures and a gradual slowdown support expectations the RBA will stay on hold for now. That shouldn't prevent AUD gains in 2H.

RBA Policy Reaction: Hold at 4.35% in line with expectations

The Reserve Bank of Australia (RBA) left the cash rate unchanged at 4.35% in a unanimous decision, in line with market expectations. The Board acknowledged that financial conditions have tightened meaningfully and that economic growth is slowing broadly as anticipated.

Communication was balanced, reflecting softer growth dynamics alongside still-high inflation. While the economy is cooling, underlying inflation remains elevated, reinforcing the need for continued policy restraint.

Sticky inflation but broadly in line with base case

Looking ahead, the RBA signalled that policy is firmly in restrictive territory and reiterated its data-dependent stance as it assesses the lagged effects of past tightening. The Board does not appear overly concerned about the unemployment rate rising toward roughly 4.5%, viewing it as consistent with a gradual cooling in growth.

Inflation is expected to return to target only slowly, with the current trajectory pointing to mid-2028. While persistent excess demand, supply-side constraints, and weak productivity continue to weigh on the inflation outlook, we see scope for a faster disinflation path. This would be driven by improving global dynamics, including easing geopolitical tensions, which could support growth via stronger consumer sentiment and reduce pressure on the RBA to tighten further.

Overall, the Board remains wary of sticky underlying inflation despite recent downside surprises in headline measures. While risks persist and further rate hikes cannot be ruled out if data disappoints, inflation has broadly tracked the RBA’s baseline scenario. Combined with a potentially more benign global backdrop, this supports our view that the RBA is likely to remain on hold for the rest of the year.

Holding pattern not a hindrance to AUD

Markets looked through Governor Bullock’s threats of further hikes, with short-term rates inching lower. That added pressure on AUD during a session in which USD is reclaiming its post-Iran-deal losses.

We have recently revised our AUD/USD call lower, trimming our year-end target to 0.73 amid a radically changed Federal Reserve story. Until last month, we expected a Fed cut in 2026; we now look for a prolonged hold, with risks tilted towards a hike through 2Q27.

For now, and likely through the summer, the Fed remains the key driver for AUD/USD. If data and Fedspeak validate the market’s hawkish pricing, upside in the pair should remain limited. The USD would continue to benefit from its fundamental appeal amid deteriorating global liquidity and sentiment.

Further out, we expect some dovish repricing of the Fed in the second half as the US domestic narrative softens. That should gradually shift focus back to AUD fundamentals - terms of trade, carry, and the growth and fiscal mix. We don't think another RBA hike is a necessary condition for AUD/USD to return to 0.73 this year.

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