Australian Dollar edges up, RBA hawkish hold does little to revive rate hike expectations

The Australian Dollar (AUD) attracts bids against its major currency peers after the Reserve Bank of Australia’s (RBA) monetary policy decision, but is still trading marginally lower at around 0.7050 against the US Dollar (USD) during the European trading session on Tuesday.

In the policy meeting, the RBA decided to leave the Official Cash Rate (OCR) unchanged at 4.35%, as expected, for the second meeting in a row and kept the door open for a fourth interest rate hike this year, citing risks to inflation remaining tilted to the upside. “Still need to see progress before being confident on CPI,” RBA Governor Michele Bullock said, adding, “We will raise rates again if needed.”

Contrary to RBA Governor Bullock stressing that the next monetary adjustment by the RBA would be on the upside, market experts see the central bank having a weak appetite for further tightening.

RBA holds as forecasts turn less hawkish, leaving Aussie data-dependent

According to TD Securities, the RBA “kept the cash rate on hold at 4.35% as expected in a unanimous decision,” with the accompanying Statement “read less hawkishly than anticipated” and “the revised forecasts imply a less hawkish stance too.” TD notes that “the Statement and the forecasts published today suggest a rate hike is not the Bank's central forecast, implying the bar for a follow-up RBA hike this year has been lifted,” adding that “the RBA's forecasts don't speak to another hike and the Bank does not appear to have the appetite to hike preemptively either.”

Even so, TD highlights that the Press Conference “took on a hawkish tone with the Governor stressing a number of times that another hike is a possibility, a risk to our call for a prolonged RBA hold.” They caution that “clearly the RBA is not out of the woods,” pointing to the Bank's “trimmed mean CPI forecasts for Q3 and Q4 [which] imply 0.8% q/q prints for both quarters.” While “the Statement and the forecasts don't signal alarm,” TD notes that “the Governor was at pains to state where the risks lie for inflation, and they are to the upside.”

Similarly, analysts at Ernst & Young (EY) have also claimed that today's ⁠decision "should ​not be interpreted as an all-clear on inflation as the Reserve Bank has signaled that ​it remains alert to upside risks and stands ready to respond," Reuters reported. "We continue to see a material risk of further policy tightening later this ​year if, as we predict, inflation proves more persistent than the Reserve Bank currently expects," EY analysts added.

Strategists at Commerzbank expect an interest rate cut by the RBA instead

Analysts at Commerzbank observed a similar communication that “does not read particularly hawkish,” with the updated projections showing a softer near-term backdrop. They highlight that “the new forecasts revised the expected unemployment rate upward, while short-term inflation forecasts were revised downward,” underscoring a less pressing need for immediate tightening.

Commerzbank points out that “only in the medium term were inflation forecasts revised upward,” a shift that “likely explains the statement that further rate hikes are certainly conceivable and that inflation risks remain on the upside.” Even so, the bank stresses that “all in all, it must be said that the decision and the forecasts seem to be in line with market expectations; the AUD is showing little movement in its initial reaction, at least.”

Looking beyond the initial response, Commerzbank reiterates its broader policy view: “In the medium term, we continue to expect that the RBA’s next move will be an interest rate cut, so the AUD is likely to remain under pressure in the coming months.”