Commerzbank’s Volkmar Baur explains that softer underlying inflation in Australia has reduced market confidence in another Reserve Bank of Australia (RBA) rate hike next week, after two consecutive moves in February and March. While headline inflation remains above target, trimmed mean and services inflation look less worrying, leaving the RBA room to pause, which could make next week pivotal for the Australian Dollar (AUD).

RBA may pause after two hikes

"Next week, the Reserve Bank of Australia will hold its next monetary policy meeting and must decide whether to raise interest rates for a third consecutive time. As of yesterday, the market was pricing in an approximately 80% probability of such a move. However, following this morning’s inflation figures, the situation no longer seems quite so certain."

"Of course, the overall rate has risen significantly. On a month-over-month basis, prices rose by 1.1%, pushing the annual rate to 4.6% - well above the central bank’s target range (2–3%). However, the details look significantly less concerning. The transportation component did rise by 8.9% year-over-year, driven by a roughly 25% increase in gasoline prices."

"But there was no discernible impact on other components. The Reserve Bank’s preferred core measure, the trimmed mean - which excludes outliers - rose only slightly in the annual rate from 3.4% to 3.5%, and other components, such as services inflation, actually eased slightly."

"If the Reserve Bank of Australia had not yet taken any action, an interest rate hike would certainly be warranted as a precautionary measure."

"And since monetary policy is known to take time to take effect - a rule of thumb is always around six months - the RBA could also decide to leave rates unchanged this time."

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