ING’s Deepali Bhargava and Francesco Pesole argue that rising energy-driven inflation and firm underlying price pressures strengthen the case for a 25bp Reserve Bank of Australia (RBA) hike on 5 May. They note that higher Oil prices and resilient domestic demand keep inflation risks skewed upward, supporting AUD/USD, with rate differentials and RBA guidance seen as key drivers into year-end.

RBA tightening bias underpins Australian Dollar

"Overall, today’s inflation print strengthens our conviction that the RBA will deliver a 25bp rate hike at the forthcoming May monetary policy meeting. With disruptions stemming from the US–Iran conflict showing little sign of abating, we expect the RBA to adopt a hawkish hike, one that preserves flexibility and allows the Bank to remain firmly data‑dependent in subsequent policy meetings."

"Markets have trimmed pricing for the 5 May meeting from 21bp to 18bp after the slightly below‑consensus March CPI print. Even so, this still leaves enough pricing for the RBA to hike without unnerving the bond market. The cash rate future curve now embeds 60bp in total by year-end."

"We expect the Reserve Bank of Australia to take some comfort from the easing in services inflation. However, the broader risk backdrop has shifted to the upside, as higher oil prices are likely to generate second-round effects that could place renewed pressure on services inflation. With further pass-through of higher oil prices into transportation, electricity, and utility costs, we now expect CPI inflation to increase to 5% YoY in 2Q, much higher than the RBA’s June 2026 target of 4.2%."

"Fundamentals ultimately matter more than positioning, and we think a hawkish RBA hike could continue to underpin broader support for AUD/USD. In our baseline scenario for the Iran war, we expect a partial reopening of the Strait of Hormuz in May."

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