Australian Dollar: RBA pause may weigh on AUD into year-end - TD Securities

TD Securities’ Prashant Newnaha sees the Reserve Bank of Australia's (RBA) 25bp hike to 4.85%, its highest rate since 2008, as a conditional pause rather than the start of another tightening cycle. Despite higher inflation forecasts, the 6-3 vote and softer growth outlook point to an extended hold. He sees the earliest rate cut in November 2027, with earlier easing possible if unemployment and housing weaken sharply, and expects the Australian Dollar (AUD) to underperform into year-end.

RBA hikes but signals conditional pause

"The Bank raised the cash rate 25bps to 4.85%, the highest since 2008. The revised forecasts point to a more hawkish inflation outlook, but a less forceful signal on what comes next. The RBA has taken insurance against a worse inflation scenario, while the 6-3 split vote, a softer activity outlook and removal of explicit further hike-guidance suggest a conditional pause, not a committed hike cycle."

"On balance, we view the RBA Governor projecting a 'conditional pause'. Our central forecast is the RBA is done hiking and will sit it out on the sidelines for an extended period."

"If history is a guide then, the earliest the RBA cuts is Nov'27."

"Of course, if the unemployment rate increases above 5% more quickly and housing activity slows materially then there is a risk the RBA could cut earlier, but that would be late Q3 or Q4 2027."

"We expect the AUD to underperform into year-end."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)