Market Musings: RBA: the hike that stops the nation
The RBA has once again acted on its ‘hawkish’ rhetoric and announced another 25bp rate hike at today’s meeting. This is the 5th interest rate increase of 2026 and puts the cash rate up at 4.85%, a high since late-2008. Moving policy around on Melbourne Cup Day has been a semi-regular event for the RBA. Today’s increase is the 9th time it has raised interest rates in November since 1997 (it has also cut rates 4 times in November over this period) (chart 1). However, this might be the “hike that stops the nation”. Because of the larger stock of household debt compared to ~18 years ago, interest rate changes now pack more of a punch than they did back then, and policy settings might be in more ‘restrictive’ territory, in our view (chart 2).
Inflation remains front-of-mind for the RBA with price pressures “elevated”, the recent data showing it is “broadly based”, and the outlook “revised materially higher” in its latest forecasts. Core inflation is only projected to get back down into the RBA’s 2-3% target band by late-2027 with it forecasted to sustainably hit the mid-point by H2 2028 (chart 3). However, this is based on an underlying working assumption of the cash rate hovering around ~4.8-4.9% over the next few years. Hence, the door to another hike still looks somewhat open if inflation continues to surprise and/or the RBA wants to get it back on track a bit faster. But on face value the latter appears less likely. While the Board reiterated it “will continue to do what it considers necessary”, it notably removed the outright ‘hawkish’ comment about “increasing the cash rate further, if needed” included at the last meeting. This, the split 6-3 Board vote in favour of today’s rate rise, the hikes already working their way through the system, and the worsening domestic economic trajectory suggests the RBA (hopes) it is in the tightening ‘endgame’ and we believe it might be a far more reluctant rate hiker from here. That said, given the domestic/global inflation impulses, over the next ~6 months, we think there is still some chance another rate rise could be needed to tackle the excess level of demand across the economy and ensure higher inflation expectations don’t become embedded (charts 4 and 5).
As outlined before, it can be a hard pill to swallow, but a prolonged period of sub-trend/weaker growth is typically the price that needs to be paid to create the extra capacity across the economy required to break the back of inflation. This is something RBA Governor Bullock highlighted by noting slower growth and higher unemployment “is needed” to lower inflation. The more challenging time for indebted households and businesses plugged into interest rate sensitive sectors looks set to become even harder. The RBA is forecasting Australian GDP growth to slow to just 1.3%pa by H2 2027 (chart 6). In time, the slower pace of growth should see the unemployment rate (now ~4.7%, its highest since Q4 2021) edge up further with the RBA projecting to move above 5% in H2 2028 (chart 7). This is a tricky time as a combination of cost-of-living pressures, jump up in mortgage costs, below average confidence, reduced housing turnover, and rising unemployment can create negative feedback loops across the Australian economy. It needs to be remembered that ‘restrictive’ monetary policy settings mean downside growth risks and the odds of a recession lift the longer they are in place.
For the AUD (now ~$0.6980), which has been dragged a bit lower at the start of the week by shaky global risk sentiment and geopolitical nerves about the situation in the Middle East, perceptions the RBA may be closer to the end than the beginning of its rate hiking phase may generate more short-run headwinds.
As mentioned previously, the positive jolt to the AUD from the upward repricing in RBA interest rate expectations earlier in the year is in the rearview mirror. Other central banks are now also on the move, and the negative economic consequences of the RBA’s actions are on the horizon. We believe the more worrisome domestic economic environment, lingering pockets of global geopolitical uncertainty, and relatively more aggressive outlook for other central banks from here, may see the AUD weaken against other currencies such as the EUR, NZD, JPY, and GBP over the next few months/quarters. For AUD/USD, push/pull forces point to bursts of intermittent volatility. As stressed before, a higher RBA cash rate should translate to a higher average range in the AUD relative to a few years ago (i.e. ~$0.69-0.71 compared to ~$0.6525 averaged over 2024/25), but not much more AUD upside potential this cycle given the domestic economic story (chart 8).
Peter Dragicevich
Currency Strategist - APAC
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