The Reserve Bank of Australia (RBA) is having a monetary policy meeting this week and will deliver its decision on Tuesday. Market participants expect the Board to deliver a 25 basis points (bps) interest rate hike, the third consecutive one. If markets are right, the Official Cash Rate (OCR) will then reach 4.35% from the current 4.1%.
As usual, policymakers will release a statement that should shed some light on the discussion that led to the decision. Governor Michele Bullock will then hold a press conference, in which she could provide additional information about officials’ assessment of the current macroeconomic situation and their perspectives for the upcoming months.
Ahead of the announcement, the Australian Dollar (AUD) trades with a soft tone amid escalating concerns about the Iran war, pushing investors into safer assets.
RBA rate hike is a done deal amid energy-driven inflation risks
The Middle East war remains the main market driver. In fact, the RBA’s expected decision has plenty to do with the war. True, the first 2026 rate hike was driven by stubborn inflation and a tight labor market. Policymakers anticipated back then that inflation would be above target “for some time.”
What RBA officials could not anticipate was that inflation would jump to 4.6% YoY in March, its highest in over two years, due to soaring Oil prices resulting from the war in Iran.
The RBA has little else to do to address higher price pressures, yet the hike won’t solve the problem. At the same time, it will create an issue for the millions of Australian households facing increased mortgage costs, a long-standing, unresolved issue in the local economy. That’s a double whammy for households that already deal with skyrocketing gas prices.
The RBA can hike rates at every single meeting in 2026, but it won’t solve the underlying problem. Still, it will create a bigger one that may have a wider impact on the local economy.
At the end of the day, the February hike was about local inflation. The next and the upcoming ones are solely a result of the Iran war. That means that, as long as the conflict continues, there is no light at the end of the tunnel.
Commerzbank strategists note that the Overnight Index Swap (OIS) market is pricing in a 74% chance of a third consecutive 25bp hike, and a total of 64bp by year-end. “The main reason is due to elevated inflation, which is expected to stay above the 2-3% target band, driven by higher fuel costs and resilient domestic demand.”
Still, accompanied by a hawkish upgrade to the accompanying statement, the Aussie is likely to find near-term support and rise And the accompanying statement should reflect mounting Board concerns about the long-term effects of the Iran war. Back in March, officials noted that most members feared that inflation expectations could become unanchored without prompt action and agreed that further tightening would likely be needed.
How will the Reserve Bank of Australia’s decision impact AUD/USD?
A rate hike has already been priced in, which means it should have a limited impact on the AUD. However, if the rate hike is accompanied by a hawkish upgrade to the accompanying statement, the Aussie is likely to find near-term support and rise. A dovish tone should put pressure on the AUD, but it is unlikely.
Valeria Bednarik, Chief Analyst at FXStreet, notes: “The AUD/USD pair trades around 0.7180, easing from last week’s peak at 0.7227, its highest since June 2022. The US Dollar (USD) is temporarily benefiting from fresh concerns about a new Middle East war, although back–and–forth headlines keep major pairs within familiar levels. The near-term picture hints at fading bullish potential, but the case for a steeper decline seems limited, with slides towards the 20-day Simple Moving Average (SMA), currently at around 0.7130, attracting buyers. A slide through it could open the door for another leg south towards 0.7090, where the next round of buyers await.”
Bednarik adds: “A hawkish RBA outcome could push the AUD/USD pair towards the mentioned multi-year high, with gains beyond it exposing the 0.7270 price zone. Additional gains are unlikely solely on the RBA’s decision, but more likely linked to war-related headlines.”
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
Economic Indicator
RBA Rate Statement
Decisions regarding this interest rate are made by the Reserve Bank Board, and are explained in a media release which announces the decision at 2.30 pm after each Board meeting.
