BNY’s Bob Savage notes the Reserve Bank of Australia (RBA) sees elevated risks that inflation expectations drift higher, potentially requiring a deeper slowdown. Oil-driven price pressures and three rate hikes to 4.35% frame the backdrop for AUD/USD.

RBA tightening risk and weak sentiment

"RBA Assistant Governor Sarah Hunter has warned that the risk of inflation expectations drifting higher is “elevated,” which could necessitate a more substantial economic slowdown to bring inflation back to target. The shock to oil prices will exert upward pressure on inflation over the next year, contributing around 0.4 percentage points to underlying inflation in the quarter to March 2027. Underlying inflation is then expected to ease, and headline inflation to fall thanks to lower oil and travel prices."

"The RBA is aiming to keep inflation expectations anchored around the midpoint of its 2-3% inflation band. Rising fuel prices, exacerbated by the Iran conflict, are driving inflation pressures, affecting travel, transport, postal services, groceries and construction costs. The RBA has raised rates three times this year to 4.35% and is monitoring how quickly firms pass higher costs on to consumers, with risks that faster and broader pass-through could drive up inflation expectations."

"The minutes from the latest RBA meeting hinted a pause after three consecutive rate hikes. The bank stated that “while it was still uncertain, financial conditions would probably be somewhat restrictive after this decision” and that this “would give the board space to see how the conflict in the Middle East develops and Australian households and businesses respond.” The RBA’s baseline forecasts assume a 60bp cash rate rise in 2026 and gradual easing of oil prices, with trading partner growth stable due to AI investment."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)