Australian Dollar: January CPI Keeps RBA on Hold Bias – ING

The Australian Dollar (AUD) held steady on Wednesday after the latest inflation data reinforced expectations that the Reserve Bank of Australia (RBA) will maintain its current interest rate stance, according to analysts at ING. The January Consumer Price Index (CPI) report, released by the Australian Bureau of Statistics, showed annual inflation at 3.4% as of January, matching consensus forecasts and remaining within the RBA’s target band, albeit at the upper edge.

Inflation Data and RBA Policy Implications

The January CPI print, released on February 28, 2025, indicated that price pressures are cooling but not fast enough to prompt an imminent rate cut. ING economists noted that the RBA’s “hold bias” is likely to persist, as the central bank seeks more evidence that inflation will sustainably return to the 2-3% target midpoint. The trimmed mean inflation, a key underlying measure, rose 3.8% year-on-year, still above the RBA’s comfort zone, giving policymakers little reason to ease monetary policy in the near term.

Financial markets are now pricing in a roughly 50% chance of a rate cut by August 2025, according to ASX 30-day interbank cash rate futures. However, ING suggests that the RBA will remain data-dependent, with upcoming labour market and services inflation figures likely to be decisive. The central bank’s next policy meeting is scheduled for March 18, 2025, where the cash rate is expected to stay at 4.35%.

Market Reaction and AUD/USD Outlook

The Australian Dollar traded in a narrow range against the US Dollar, hovering near $0.6500 in the Asian session. The currency has been supported by firm commodity prices, particularly iron ore, and a relatively resilient domestic economy. However, ING cautions that the AUD’s upside may be limited in the short term, as the US Federal Reserve’s policy path and global risk sentiment remain key drivers.

ING’s FX strategists point out that the interest rate differential between Australia and the US continues to favour the dollar, but any shift in the Fed’s stance could alter that dynamic. They also note that China’s economic recovery, a major demand source for Australian exports, will be a critical factor for the AUD. A stronger-than-expected rebound in China could boost the Australian Dollar, while a slowdown would weigh on it.

What This Means for Investors and Consumers

For Australian households and businesses, the RBA’s hold bias means borrowing costs are likely to remain elevated for a while longer. Mortgage holders with variable-rate loans will not see immediate relief, while savers may continue to benefit from higher deposit rates. For currency traders, the AUD’s range-bound trading offers opportunities, but the lack of a clear directional catalyst suggests caution.

The RBA’s cautious approach reflects a broader global trend, as central banks in major economies are also waiting for clearer disinflation signals before adjusting policy. This synchronised patience is likely to keep currency markets volatile, with data releases playing an outsized role in short-term movements.

Conclusion

As of February 28, 2025, the Australian Dollar’s near-term outlook is tied to the RBA’s data-dependent stance, with January CPI providing no urgency for a rate change. ING’s analysis suggests that the hold bias will persist until inflation shows more convincing signs of easing. For now, the AUD is likely to remain rangebound, with investors watching upcoming economic indicators and global developments for direction.

FAQs

Q1: What is the RBA’s current cash rate and when is the next decision?
The RBA’s cash rate is 4.35% as of February 2025. The next monetary policy decision is scheduled for March 18, 2025, and the central bank is widely expected to hold rates steady.

Q2: How did the January CPI affect the Australian Dollar?
The January CPI, at 3.4% year-on-year, was in line with expectations and did not provide a strong catalyst for AUD movement. The currency remained rangebound against the USD, as traders focused on the RBA’s hold bias and global factors.

Q3: What could trigger a rate cut by the RBA?
A sustained decline in underlying inflation, particularly the trimmed mean measure, combined with softening labour market conditions, could prompt the RBA to consider rate cuts. ING suggests that the bank will need to see several months of convincing data before moving.