RBA set to raise interest rate amid war-driven inflation
- The Reserve Bank of Australia is expected to hike interest rates to 4.35%.
- Eyes on RBA Governor Bullock’s press conference and hints on additional hikes ahead.
- The Australian Dollar trades near multi-year highs, bullish momentum fades.
The Reserve Bank of Australia (RBA) is having a monetary policy meeting this week and will deliver its decision on Tuesday. Market participants expect the Board to deliver a 25 basis points (bps) interest rate hike, the third consecutive one. If markets are right, the Official Cash Rate (OCR) will then reach 4.35% from the current 4.1%.
As usual, policymakers will release a statement that should shed some light on the discussion that led to the decision. Governor Michele Bullock will then hold a press conference, in which she could provide additional information about officials' assessment of the current macroeconomic situation and their perspectives for the upcoming months.
Ahead of the announcement, the Australian Dollar (AUD) trades with a soft tone amid escalating concerns about the Iran war, pushing investors into safer assets.
RBA rate hike is a done deal amid energy-driven inflation risks
The Middle East war remains the main market driver. In fact, the RBA’s expected decision has plenty to do with the war. True, the first 2026 rate hike was driven by stubborn inflation and a tight labor market. Policymakers anticipated back then that inflation would be above target “for some time.”
What RBA officials could not anticipate was that inflation would jump to 4.6% YoY in March, its highest in over two years, due to soaring Oil prices resulting from the war in Iran.
The RBA has little else to do to address higher price pressures, yet the hike won’t solve the problem. At the same time, it will create an issue for the millions of Australian households facing increased mortgage costs, a long-standing, unresolved issue in the local economy. That’s a double whammy for households that already deal with skyrocketing gas prices.
The RBA can hike rates at every single meeting in 2026, but it won’t solve the underlying problem. Still, it will create a bigger one that may have a wider impact on the local economy.
At the end of the day, the February hike was about local inflation. The next and the upcoming ones are solely a result of the Iran war. That means that, as long as the conflict continues, there is no light at the end of the tunnel.
Commerzbank strategists note that the Overnight Index Swap (OIS) market is pricing in a 74% chance of a third consecutive 25bp hike, and a total of 64bp by year-end. “The main reason is due to elevated inflation, which is expected to stay above the 2-3% target band, driven by higher fuel costs and resilient domestic demand.”
Still, accompanied by a hawkish upgrade to the accompanying statement, the Aussie is likely to find near-term support and rise And the accompanying statement should reflect mounting Board concerns about the long-term effects of the Iran war. Back in March, officials noted that most members feared that inflation expectations could become unanchored without prompt action and agreed that further tightening would likely be needed.
How will the Reserve Bank of Australia’s decision impact AUD/USD?
A rate hike has already been priced in, which means it should have a limited impact on the AUD. However, if the rate hike is accompanied by a hawkish upgrade to the accompanying statement, the Aussie is likely to find near-term support and rise. A dovish tone should put pressure on the AUD, but it is unlikely.
Valeria Bednarik, Chief Analyst at FXStreet, notes: “The AUD/USD pair trades around 0.7180, easing from last week’s peak at 0.7227, its highest since June 2022. The US Dollar (USD) is temporarily benefiting from fresh concerns about a new Middle East war, although back–and–forth headlines keep major pairs within familiar levels. The near-term picture hints at fading bullish potential, but the case for a steeper decline seems limited, with slides towards the 20-day Simple Moving Average (SMA), currently at around 0.7130, attracting buyers. A slide through it could open the door for another leg south towards 0.7090, where the next round of buyers await.”
Bednarik adds: “A hawkish RBA outcome could push the AUD/USD pair towards the mentioned multi-year high, with gains beyond it exposing the 0.7270 price zone. Additional gains are unlikely solely on the RBA’s decision, but more likely linked to war-related headlines.”
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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 May 05, 2026 04:30
Frequency: Irregular
Consensus: 4.35%
Previous: 4.1%
Source: Reserve Bank of Australia
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