The Reserve Bank of Australia (RBA), the nation's central bank, announced its August monetary policy decision on August 11 at 12:30 PM Beijing time, keeping the cash rate steady at 4.35%. This move aligned with market expectations and marks the second consecutive meeting where the RBA has held rates unchanged.
RBA Governor Michele Bullock stated during the press conference that inflation risks remain tilted to the upside and that the central bank stands ready to tighten policy further if necessary. The accompanying policy statement highlighted that rising fuel costs are being passed through to other goods and services, suggesting that elevated inflation could persist for an extended period. This indicates a growing consensus within the RBA that Australia is facing stubbornly high inflation. The decision to pause rate hikes, despite this outlook, appears driven by the fact that three consecutive increases in the first half of the year have already begun to significantly dampen economic activity.
According to the RBA's policy statement, the cash rate target has been raised three times since the start of this year. Given that monetary policy is now considered to be slightly restrictive, the board opted to maintain the current rate to assess the evolving economic landscape. The rate hikes occurred in February, March, and May, each by 25 basis points, totaling 75 basis points and lifting the benchmark rate from 3.6% to 4.35%. This level matches the rate seen just before the rate cuts began in February 2025. A further rate increase would push the cash rate to its highest point in nearly 12 years. For an inflation rate currently at 3.9%, a multi-decade high in interest rates appears disproportionate, which is likely one factor discouraging the RBA from further tightening.
Similar to the inflation patterns observed in most developed economies, Australia's inflation curve shows a strong correlation with the price of US crude oil. The latest quarterly data shows Australia's CPI at 3.9% for the second quarter, down from 4.1% in the first quarter but still at the highest level since January 2024. Since the second quarter, US crude oil prices have experienced significant volatility, initially surging from $57 to $105 per barrel before sharply declining to $69.5 following indications of a peace agreement between the US and Iran. Currently, US crude is trading around $83 per barrel, notably lower than its price when the RBA's Q2 inflation data was released. This suggests that Australia's Q3 CPI annual rate could be significantly lower than the Q2 figure, potentially serving as a second reason for the RBA's decision to hold steady this time. The trajectory of interest rates, not just for the RBA but for most developed central banks including the Federal Reserve, is heavily dependent on fluctuations in international crude oil prices when formulating monetary policy.
The AUDUSD reacted with a swift decline on the minute-level chart following the rate decision, indicating that market participants viewed the decision to hold rates as a bearish signal for the Australian dollar. However, the longer-term daily and weekly trends for AUDUSD are more heavily influenced by the monetary policy stance of the Federal Reserve and the broader direction of the US dollar index. The outlook for the US-Iran situation remains uncertain, and cautious institutions typically avoid making definitive predictions about future developments. However, it can be hypothesized that if the Strait of Hormuz were to reopen (a likely scenario), the risk of high inflation in the US would dissipate. This could prompt the Federal Reserve, represented by officials like Kevin Warsh, to quickly abandon its rate hike options, leading to a phase of decline for the US dollar index. Such a development would be a substantial positive catalyst for the bullish trend in the AUDUSD pair.
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