Australian Dollar: AUD may face year-end pressure from RBA pause - TD Securities

The Reserve Bank of Australia's (RBA) 25bp increase to 4.85%, its highest rate since 2008, represents a conditional pause rather than the beginning of a fresh tightening cycle, according to TD Securities’ Prashant Newnaha. Although inflation forecasts have risen, he views the 6-3 vote and weaker growth outlook as signs that rates will remain on hold for an extended period. November 2027 is the earliest he envisages a rate cut, though a sharp deterioration in unemployment and housing could bring easing forward. He also expects the Australian Dollar (AUD) to underperform into year-end.

RBA raises rates while signalling a 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.)