RBA set for first interest rate hike in over two years as inflation pressures intensify
- The Reserve Bank of Australia is set to hike the interest rate by 25 bps to 3.85% in February.
- RBA Governor Bullock’s words and updated economic forecasts could offer hints on future rate hikes.
- The Australian Dollar braces for intense volatility on the RBA policy announcements.
The Reserve Bank of Australia (RBA) is widely expected to raise the Official Cash Rate (OCR) to 3.85% from 3.6% after concluding its first monetary policy meeting of 2026.
The decision will be announced on Tuesday at 03:30 GMT, accompanied by the Monetary Policy Statement (MPS) and the quarterly economic forecasts, followed by RBA Governor Michele Bullock’s press conference at 04:30 GMT.
The Australian Dollar (AUD) is set to rock in reaction to the RBA policy announcement and updated economic projections.
RBA is set to break the global easing trend
The RBA is on track to deliver its first interest rate hike in more than two years when it meets on Tuesday for its February monetary policy meeting, ditching the global easing trend in an attempt to curb the rising inflationary pressures.
During the press conference following the December monetary policy decision, Governor Michele Bullock explicitly said, “the Board will do what it needs to do to get inflation down,” adding that “If data suggests inflation is not slowing, that will be considered at the Feb board meeting.”
Data from the Australian Bureau of Statistics (ABS) showed last Wednesday that the monthly Consumer Price Index (CPI) leaped to 3.8% in December from 3.4% in November and above forecasts of a 3.6% rise.
The trimmed mean CPI, the RBA’s closely watched measure of core inflation, rose 0.9% quarterly in the fourth quarter, beating the market forecasts of a 0.8% increase.
Following the hot inflation numbers, money markets implied a 73% probability of a rate hike, compared with 60% previously, according to Reuters.
Meanwhile, Australia’s big four banks, including the ANZ, Westpac, Commonwealth Bank of Australia and the National Australia Bank (NAB), altered their call, forecasting a quarter-point RBA rate hike in February.
Another economic indicator backing the expected rate lift-off was the Australian labor data. On January 22, the ABS said that the Unemployment Rate unexpectedly dropped to 4.1%, the lowest level since May, from 4.3%. Net employment jumped by 65.2K in December from -28.7K in November.
How will the Reserve Bank of Australia’s decision impact AUD/USD?
The AUD appears exposed to two-way risks against the US Dollar (USD) in the lead-up to the RBA showdown.
AUD/USD could snap the corrective trend and resume its uptrend if the RBA Governor Bullock’s comments and the updated economic forecasts suggest that more rate hikes remain on the table in the coming months.
Conversely, the Aussie pair could stretch its recent downtrend if RBA Governor Bullock plays down expectations of further rate hikes amid a potentially stable inflation projection.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, highlights key technical levels for trading AUD/USD following the policy announcement.
“AUD/USD is trading under the 0.7000 threshold ahead of the RBA rate call, holding its correction from a three-year peak of 0.7094 set on Thursday. The 14-day Relative Strength Index (RSI) has fallen sharply from the overbought region to currently test the 60 level, suggesting that the upward bias still remains intact.”
“The Aussie pair could reverse course and initiate a fresh uptrend toward the 0.7050 psychological level on a hawkish RBA rate hike. The next relevant resistance levels are aligned at the 2026 high of 0.7094 and the February 2023 high of 0.7158. Alternatively, the pair could challenge the 0.6900 area if the RBA disappoints the hawks. A firm break below that level will unleash additional downside toward the 0.6850 psychological barrier. The last line of defense for buyers is seen at the 0.6800 round figure,” Dhwani adds.
Economic Indicator
RBA Interest Rate Decision
The Reserve Bank of Australia (RBA) announces its interest rate decision at the end of its eight scheduled meetings per year. If the RBA is hawkish about the inflationary outlook of the economy and raises interest rates it is usually bullish for the Australian Dollar (AUD). Likewise, if the RBA has a dovish view on the Australian economy and keeps interest rates unchanged, or cuts them, it is seen as bearish for AUD.
Read more.Next release: Tue Feb 03, 2026 03:30
Frequency: Irregular
Consensus: 3.85%
Previous: 3.6%
Source: Reserve Bank of Australia
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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