AUD: RBA can still hike in September
As we expected, the Reserve Bank of Australia (RBA) kept rates on hold today, defying consensus expectations. The Bank pointed out how higher interest rates are “working to establish a more sustainable balance between supply and demand in the economy” and opted for a pause to better assess incoming data.
The new CPI forecasts now see inflation declining to 3.25% by the fourth quarter of next year and fall back into target by the end of 2025. This is probably a dovish signal, as it implies the current pace of tightening is appropriate to take inflation back to target in an acceptable timeframe. However, the RBA has shown elevated sensitivity to data, and we doubt this will change very soon: another high inflation read may well convince it to add a hike before the peak. Our base case is still for one last 25bp increase to be delivered in September when electricity tariffs could deliver an inflation surprise.
AUD may underperform other peers like the NZD and the Scandies until a bullish “pocket” emerges in September, should the RBA go ahead with one last hike.
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