AUD: RBA hikes cash rate, inflation concerns persist – TD Securities

The Reserve Bank of Australia (RBA) raised the target cash rate by 25bps to 3.85% in a unanimous decision, citing risks to inflation from excess demand and capacity constraints. The RBA's core inflation forecast was increased from 2.7% to 3.2% for 2026, indicating the likelihood of further action. The AUD is expected to trade between 69-71 cents in the near term, note Prashant Newnaha and Alex Loo from TD Securities.

RBA's hawkish stance on inflation

"The Bank raising its core inflation forecast from 2.7% to 3.2% for 2026 even with the Bank assuming a 4.20% cash rate for this year implies another hike is likely."

"On the domestic side, if growth in demand is stronger than expected, and growth in the economy’s supply capacity remains limited, it is likely to add further to capacity pressures."

"The fact that the RBA raised its core inflation forecast from 2.7% to 3.2% for 2026 suggests the RBA sees capacity constraints as an ongoing issue."

"For now, we don't expect the RBA to hike before its next SoMP meeting and therefore stick with the RBA's next hike to be delivered in May to 4.10%."

"We expect AUD to trade in the 69-71 cents range in the near-term, with a bias to buy the dip."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)