RBA likely to hold interest rate as softer inflation prompts a wait-and-see approach

The Reserve Bank of Australia (RBA) is on track to keep the Official Cash Rate (OCR) steady at 4.35% for the second consecutive meeting on Tuesday.

The decision will be announced at 04:30 GMT, accompanied by the Monetary Policy Statement (MPS) and updated economic forecasts. RBA Governor Michele Bullock’s press conference will follow at 05:30 GMT.

The Australian Dollar (AUD) is set to experience volatility around the RBA policy announcement and Bullock’s press conference, with markets focused less on the widely expected hold and more on signals about the central bank’s next policy move, as softer-than-expected inflation data could cloud the central bank’s outlook on interest rates.

RBA set for another pause, what’s next?

While markets had previously priced in the possibility of another rate hike in August, expectations have shifted dramatically following a softer-than-expected second-quarter (Q2) inflation report, reducing the urgency for the RBA to tighten policy again.

The turning point came with Australia’s latest Consumer Price Index (CPI) report, which showed underlying inflation slowing more than expected.

The RBA’s preferred Trimmed Mean CPI rose 0.8% quarter-on-quarter (QoQ) in the second quarter, below market expectations for a 0.9% increase. Annual Trimmed Mean inflation accelerated only modestly to 3.6% from 3.5%, remaining below the central bank’s own 3.8% forecast.

Following the CPI release, Bloomberg data showed that the implied probability of a rate hike in August collapsed to just 4%, down from more than 20% before the data.

Expectations for a fourth rate hike later this year also receded sharply, with market pricing falling below 50%, compared with roughly 84% pre-data release.

This swift repricing suggests markets increasingly believe the RBA has room to remain patient, while assessing whether recent signs of easing inflation are sufficient to pause the tightening cycle.

Even though headline inflation benefited from lower fuel prices during June, Oil prices moved higher again after a renewed outbreak of conflict involving Iran during July.

Additionally, Australia’s temporary fuel excise discount expired on August 2, removing a temporary source of downward pressure on fuel prices and potentially adding fresh upside risks for inflation in the months ahead.

Against this backdrop, the RBA is likely to adopt a cautious tone, maintaining a data-dependent approach, as policymakers continue to balance slowing economic momentum against still-elevated price pressures.

Additionally, the RBA could consider the updated inflation and growth forecasts and whether the likely reopening of the Strait of Hormuz is enough to calm inflation concerns and to signal a pause in the current tightening cycle.

RBA seen on hold as summer lull keeps focus on data

Analysts at Rabobank note that attention turns to Australia on Tuesday, when “the Reserve Bank of Australia sets rates.” They acknowledge that they are “not entirely convinced that the three hikes delivered since the start of the year are enough to mop up excess demand in the Australian economy, but the RBA seems to hope it is.” Even so, Rabobank expects policymakers to “hold rates unchanged this week,” a view they point out is shared by “all other 31 economists surveyed by Bloomberg.” More broadly, the bank highlights that “it’s peak summer, with a light data calendar and most central bankers on holiday,” adding that “the Fed’s Hammack is an exception.”

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

The AUD is hanging close to seven-week highs against the US Dollar (USD) ahead of Tuesday’s RBA policy announcements.

With a rate hold largely priced in, the policy statement and updated forecasts, alongside Governor Bullock’s message, will likely matter more than the rate decision itself.

If Bullock and the MPS acknowledge softer inflation while emphasizing patience and data dependence, that could reinforce expectations that interest rates have peaked, potentially weighing on the Aussie Dollar and the AUD/USD pair.

Alternatively, if inflation forecasts are revised higher, followed by Bullock’s still concerning remarks on inflation, it could leave further rate hikes on the table, providing fresh support to AUD/USD.

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

“The Aussie pair trades firmly above the short- and medium-term moving averages. The 21-day and 50-day Simple Moving Averages (SMAs) bullish crossover underpins the advance, while the 200-day SMA at 0.6926 reinforces the broader bullish structure. The Relative Strength Index (RSI) near 60 leans higher but remains shy of overbought territory, suggesting upside momentum remains constructive on the daily chart.”

“On the topside, immediate resistance is located at the 0.7100 round level, which could act as the next pivot for trend continuation. Further up, the June 5 high near 0.7145 could be tested. On the downside, initial support is seen around 0.7000, the confluence zone of the 21-day SMA and 50-day SMA. Below that, the 200-day SMA at 0.6926 could act as a deeper line of defense,” Dhwani adds.