Australian Dollar Leaps 0.80% on 'Hawkish' RBA Hike
Warren TakundaSummary:
Australian dollar upside momentum is reaffirmed.
The Aussie dollar's stellar 2026 was refuelled by its central bank which not only raised interest rates but also pointed to the prospect of further such moves.
The Reserve Bank of Australia (RBA) raised interest rates 25bp to 3.85%, in line with expectations, but surprised markets by indicating this was no one-off decision.
The hike is the first since November 2023 and a response to inflation that "picked up materially in the second half of 2025," said the RBA.
Economists warned of another rate hike soon, observing that the RBA is clearly concerned about domestic demand, while saying negative developments overseas have failed to dampen domestic activity.
"A notable rise in AUD/USD to above 0.70 after RBA raised rates to 3.85%, a hawkish hike," says Danske Bank. GBP/AUD falls 0.80% to reach its lowest level since December 2024 at 1.9463.
A 'hawkish' hike describes one that comes with guidance that similar moves are possible in the future. Had this been a cautionary one-off rate rise, the AUD might have been under pressure following the decision in a "sell the fact" reaction.
"Some of the increase in inflation reflects greater capacity pressures. As a result, the Board considers that inflation is likely to remain above target for some time," said the RBA.
"Uncertainty in the global economy remains significant but so far there has been little or no depressing effect on the Australian economy; indeed, recent growth and trade in Australia’s major trading partners has surprised on the upside," it added.
The central bank said strong demand momentum is considered a prime driver of capacity pressures and, ultimately, inflation.
When central banks think demand is running ahead of the economy's output capacity, they raise interest rates to cool that demand.
However, economist Adam Boyton at ANZ says the market might be getting ahead of itself here, and this could well be a one-off move.
"We suspect, however, that the RBA may end up (marginally) pleasantly surprised on the inflation front. We also think that a likely slowing in real household income growth, the current low level of consumer confidence and today’s rate hike will see weaker consumer spending growth," he explains.
As a result, while the RBA’s base case might be that another hike is more likely than not, ANZ thinks that today’s action from the RBA Board should end up being the only move this year.
If that scenario were to emerge, AUD momentum could fade.
However: "risks are clearly skewed to an additional hike, though, given the RBA’s focus on capacity being behind the H2 2025 lift in inflation," concedes Boyton.
With no immediate data releases to challenge the narrative, the Australian dollar will hold onto its positive momentum and extend its period of outperformance.
Source: Poundsterlinglive
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