RBA expected to hike interest rates in February amid resurging inflation

The Reserve Bank of Australia (RBA) is widely expected to raise the Official Cash Rate (OCR) to 3.85% from 3.6% after concluding its first monetary policy meeting of 2026.

The decision will be announced on Tuesday at 03:30 GMT, accompanied by the Monetary Policy Statement (MPS) and the quarterly economic forecasts, followed by RBA Governor Michele Bullock’s press conference at 04:30 GMT.

The Australian Dollar (AUD) is set to rock in reaction to the RBA policy announcement and updated economic projections.

RBA is set to break the global easing trend

The RBA is on track to deliver its first interest rate hike in more than two years when it meets on Tuesday for its February monetary policy meeting, ditching the global easing trend in an attempt to curb the rising inflationary pressures.

During the press conference following the December monetary policy decision, Governor Michele Bullock explicitly said, “the Board will do what it needs to do to get inflation down,” adding that “If data suggests inflation is not slowing, that will be considered at the Feb board meeting.”

Data from the Australian Bureau of Statistics (ABS) showed last Wednesday that the monthly Consumer Price Index (CPI) leaped to 3.8% in December from 3.4% in November and above forecasts of a 3.6% rise.

The trimmed mean CPI, the RBA’s closely watched measure of core inflation, rose 0.9% quarterly in the fourth quarter, beating the market forecasts of a 0.8% increase.

Following the hot inflation numbers, money markets implied a 73% probability of a rate hike, compared with 60% previously, according to Reuters.

Meanwhile, Australia’s big four banks, including the ANZ, Westpac, Commonwealth Bank of Australia and the National Australia Bank (NAB), altered their call, forecasting a quarter-point RBA rate hike in February.

Another economic indicator backing the expected rate lift-off was the Australian labor data. On January 22, the ABS said that the Unemployment Rate unexpectedly dropped to 4.1%, the lowest level since May, from 4.3%. Net employment jumped by 65.2K in December from -28.7K in November. 

How will the Reserve Bank of Australia’s decision impact AUD/USD?

The AUD appears exposed to two-way risks against the US Dollar (USD) in the lead-up to the RBA showdown.

AUD/USD could snap the corrective trend and resume its uptrend if the RBA Governor Bullock’s comments and the updated economic forecasts suggest that more rate hikes remain on the table in the coming months.

Conversely, the Aussie pair could stretch its recent downtrend if RBA Governor Bullock plays down expectations of further rate hikes amid a potentially stable inflation projection.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, highlights key technical levels for trading AUD/USD following the policy announcement.

“AUD/USD is trading under the 0.7000 threshold ahead of the RBA rate call, holding its correction from a three-year peak of 0.7094 set on Thursday. The 14-day Relative Strength Index (RSI) has fallen sharply from the overbought region to currently test the 60 level, suggesting that the upward bias still remains intact.”

“The Aussie pair could reverse course and initiate a fresh uptrend toward the 0.7050 psychological level on a hawkish RBA rate hike. The next relevant resistance levels are aligned at the 2026 high of 0.7094 and the February 2023 high of 0.7158. Alternatively, the pair could challenge the 0.6900 area if the RBA disappoints the hawks. A firm break below that level will unleash additional downside toward the 0.6850 psychological barrier. The last line of defense for buyers is seen at the 0.6800 round figure,” Dhwani adds.