Inflation risks keep RBA on edge, says BNY – Australian dollar outlook

The Australian dollar remains under pressure as persistent inflation risks keep the Reserve Bank of Australia cautious on rate cuts, according to a new analysis from BNY. The currency’s trajectory hinges on whether domestic price pressures ease enough to allow the central bank to shift its stance later this year.

BNY flags sticky inflation as key hurdle for RBA

In a note to clients, BNY strategists highlighted that Australia’s inflation data has been slower to moderate than in other developed economies, complicating the RBA’s policy path. While markets have priced in some chance of a rate cut in late 2025, BNY argues that the central bank will need to see sustained evidence of disinflation before moving.

The RBA has held its cash rate at 4.35% since November 2023, maintaining a cautious tone in recent statements. Governor Michele Bullock has repeatedly emphasized that the board is not ruling anything in or out, but the persistence of services inflation and a tight labor market suggest rate cuts are not imminent.

Australian dollar sensitivity to rate differentials

The Australian dollar’s value is heavily influenced by interest rate differentials with the United States. If the Federal Reserve cuts rates more aggressively than the RBA, the gap could narrow, potentially supporting the AUD. However, BNY notes that the current market pricing already reflects a relatively hawkish RBA, limiting upside surprise potential.

Trade dynamics also play a role. Australia’s commodity exports, particularly iron ore and liquefied natural gas, have faced softer demand from China, adding to headwinds for the currency. BNY’s analysis suggests that without a clear catalyst, the Australian dollar may remain range-bound in the near term.

What this means for investors and businesses

For importers and exporters, the uncertain rate outlook means currency hedging remains critical. A prolonged period of elevated rates could keep the Australian dollar stronger than some forecasts predict, while a sudden shift in inflation data could trigger rapid moves. Households with variable-rate mortgages also face continued uncertainty, as the RBA’s caution suggests relief may not arrive until well into 2025 or later.

Conclusion

BNY’s analysis underscores that the RBA’s inflation challenge is far from resolved. Until core CPI trends convincingly lower, the central bank is likely to hold its ground, keeping the Australian dollar in a cautious holding pattern. Investors should watch upcoming monthly CPI prints and labor market reports for signals on the next policy move.

FAQs

Q1: Why is the RBA hesitant to cut rates?
The RBA is concerned that underlying inflation, particularly in services, remains too high. Cutting rates prematurely could reignite price pressures and undermine the progress made so far.

Q2: How does BNY’s analysis affect Australian dollar forecasts?
BNY suggests that the Australian dollar may stay range-bound near current levels unless inflation data shifts decisively. A rate cut by the Fed before the RBA could provide some support, but the outlook remains uncertain.

Q3: When might the RBA actually cut rates?
Most economists expect the first rate cut in the first half of 2025, but this depends on inflation data. If CPI remains sticky, cuts could be delayed until late 2025 or even 2026.