Australian Dollar Gains as Hawkish RBA Signals Further Tightening
The Australian dollar strengthened after the Reserve Bank of Australia (RBA) raised interest rates as expected. The policymakers warned that inflationary pressures could persist longer than expected amid escalating conflict in Iran.
The AUD advanced in today's trading session (March 17), with AUD/USD rising about 0.5% to 0.7118. Meanwhile, AUD/NZD climbed to its highest level since May 2013, reflecting firm demand for the currency.
In its latest policy meeting, the Reserve Bank of Australia (RBA) decided to raise interest rates by 25 basis points to 4.10%, in line with market expectations. The central bank cited material risks that inflation could remain above target for longer, driven in part by geopolitical uncertainty in the Middle East. Ongoing tensions in the region are also seen as a potential catalyst for higher global and domestic price pressures.
The rate decision was narrowly passed in a 5-4 vote, highlighting divisions within the policy board. Despite this split, the forward guidance retained a clearly hawkish tone, suggesting further tightening remains on the table.
RBA Governor Michele Bullock revealed that policymakers had considered delaying the interest rate hike until May. However, the majority ultimately questioned whether current policy settings are sufficiently restrictive to bring inflation sustainably back to target.
This statement was interpreted as a signal that there is still room for policy tightening. Expectations for further interest rate hikes have also increased, with the probability of a hike in May rising from 25% to 40%. Still, most analysts continue to forecast a terminal rate of around 4.35% by August.
Sally Auld, chief economist at National Australia Bank (NAB), assessed that a tightening of just 50 basis points may not be enough to ensure that Australian inflation stabilizes back within the target range. As such, she continues to project an additional interest rate hike of 25 basis points in May.
Since the RBA's move has been largely anticipated since last week, the market reaction was relatively muted. Nevertheless, the Australian dollar retains a positive bias, supported by the RBA's more assertive stance compared with other major central banks.