RBA Holds Rates Steady, Eyes September for Potential Tightening

AUD: Another skip by the RBA

The Reserve Bank of Australia (RBA) kept rates unchanged overnight, as expected by the OIS market which was attaching a 20% implied probability of a hike before the meeting. Once again, policymakers have decided to attach greater importance to the monthly inflation reading (May’s CPI slowed from 6.8% to 5.6% year-on-year) than to jobs market figures (the latest print was very strong).

Still, the statement clearly leaves the door open for more tightening if required and reiterates a strictly data-dependent approach to further monetary policy decisions. Today’s hold is explicitly referred to as needed to provide the Board with “more time to assess the state of the economy and the economic outlook and associated risks”.

As noted by our economics team in a note released overnight, September could be a better occasion for the RBA to increase rates again, as it can assess the impact of large electricity tariff increases due in July, which should become visible in CPI figures by September.

Markets are actively speculating on further RBA tightening and the initial drop in AUD/USD after the hold is already being reverted. With a September rate hike almost fully priced in, we expect the pair to be almost entirely driven by external factors (Fed, US data, Chinese sentiment): for now, the upside looks somewhat limited, although the room for a rally later in the year should emerge.