AUD/USD retreats as RBA delivers expected rate cut, signals limited easing ahead
- The RBA cuts its Official Cash Rate by 25 bps, citing fading upside inflation risks and global headwinds.
- The Australian Dollar is pressured further by domestic political rift and China’s latest PBoC rate cut.
- RBA Governor Bullock signals flexibility but downplays prospects of an extended easing cycle.
The Australian Dollar (AUD) inches lower to 0.6415 against the US Dollar (USD) on Tuesday, attempting to stabilize near the previous day's low. The Aussie came under renewed pressure after the Reserve Bank of Australia (RBA) lowered its benchmark interest rate by 25 basis points, from 4.10% to 3.85%, the lowest level since 2023. The move was widely anticipated by financial markets, with major banks including Westpac and Commonwealth Bank of Australia (CBA) pricing in a quarter-point cut ahead of the meeting.
AUD/USD slipped around 0.65% to 0.6408 following the decision, reversing Monday’s modest gains. Political instability added to the bearish tone after the National Party withdrew support from Australia’s opposition coalition. Additionally, sentiment around the Aussie soured on the back of a fresh rate cut by the People’s Bank of China (PBoC), which fueled growth concerns in Australia’s top trading partner.
The RBA noted in its policy statement that the upside risks to inflation have eased, with recent data showing a continued slowdown in price pressures. “Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance,” Governor Michele Bullock noted.
Striking a more measured tone compared to February’s hawkish stance, Bullock acknowledged that the global context has shifted for the worse, citing US President Donald Trump’s April 2 tariff announcement and ongoing uncertainty around the international outlook. Speaking to reporters after the decision, she said the board had considered both holding rates steady and a larger 50 basis point cut, but ultimately opted for a cautious 25 bps move.
“Does it mean we’re headed into a long series of interest rate cuts? I don’t know at this point… that’s why I think the cautious 25-basis-point cut with a recognition that if we need to move quickly, we can. We have got space,” she added.
Still, the Aussie found some support from a broadly weaker US Dollar. The US Dollar Index (DXY) extended its losing streak to trade near the 100.00 mark on Tuesday as USD bulls remain sidelined after Moody’s downgraded the US credit rating to Aa1, citing rising debt levels and widening fiscal deficits. Also, growing concerns over the US fiscal outlook following President Donald Trump’s approval of new tax cuts without offsetting spending reductions continue to pressure the Greenback.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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