ING expects the Australian dollar to recover after post-RBA weakness, saying the central bank retains its hawkish credentials and stands ready to hike again if inflation data materially surprises.
Earlier:
- Westpac sees upside inflation risks after RBA lifts cash rate to 4.35% in 8-1 vote
- AUD faces headwinds above 0.72 as RBA signals pause, TD warns
- CBA sees RBA on hold for rest of 2026 after third consecutive hike to 4.35%
Summary:
- The RBA raised the cash rate 25 basis points to 4.35% in an 8-1 vote, more decisive than the prior meeting's split decision, according to ING's analysis
- GDP growth forecasts were cut by 0.5 percentage points to 1.3% for 2026, with the unemployment rate revised up to 4.6% by end-2027, per ING's reading of the RBA's Statement on Monetary Policy
- Trimmed mean CPI was revised up only modestly by 0.1 percentage points to 3.8% for mid-2026, with headline CPI still expected to peak at 4.8% in mid-2026 and return to target only by mid-2028, according to ING
- The RBA's communication suggests the cash rate sits within but close to the upper bound of model-based neutral rate estimates, with policy now viewed as restrictive, per ING
- ING expects the RBA to remain on hold in June unless inflation data materially surprises to the upside, according to the note
- The Australian dollar's post-decision dip is seen as short-lived, with ING arguing the RBA has followed through on its hawkish credentials and stands ready to do more if needed
The Reserve Bank of Australia's decision to lift the cash rate to 4.35% was delivered with conviction, but the accompanying growth downgrade and only modest inflation revision have prompted analysts at ING to call a pause in June, even as the bank flagged the Australian dollar's recent weakness as unlikely to endure.
The 8-1 vote in favour of a 25 basis point increase marked a stronger consensus than the split decision at the prior meeting, removing any ambiguity about the board's direction of travel. However, ING noted that the substance of the RBA's updated forecasts and the tone of Governor Michele Bullock's communication pointed to a central bank that was now more alert to the risks on both sides of its mandate rather than one committed to further near-term tightening.
The growth picture was revised down sharply. GDP growth for 2026 was cut by half a percentage point to 1.3%, while the unemployment rate track was lifted to 4.6% by end-2027, a combination that ING interpreted as signalling genuine concern about activity holding up under the weight of higher rates and the income shock flowing from the Middle East conflict. Against that, the inflation revision was comparatively modest, with trimmed mean CPI lifted by just 0.1 percentage points to 3.8% for mid-2026. Headline CPI is still expected to peak at 4.8% around the same time before only gradually drifting back to the 2.5% target by mid-2028.
ING observed that the RBA's own assessment placed the current cash rate within, but close to the upper bound of, model-based estimates of the neutral rate, suggesting the board views policy as now doing meaningful work without necessarily requiring further near-term additions.
For the Australian dollar, ING's read was constructive. Any post-decision softness was characterised as unlikely to last, with the bank arguing the RBA had once again demonstrated its hawkish credentials and remained prepared to move again should inflation data deliver a material upside surprise before the June meeting. That optionality, analysts suggested, should provide a durable underpinning for the currency once the pause narrative is fully absorbed by markets.
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ING's view that the Australian dollar's post-decision weakness is unlikely to last will be the key takeaway for currency traders, with the bank's assessment that the RBA retains its hawkish credentials providing a floor for AUD even as the pause narrative takes hold. The growth downgrade, with GDP cut by half a percentage point to 1.3% for 2026, introduces a genuine headwind for the currency if activity data deteriorates faster than the RBA's revised forecasts imply, particularly given the unemployment track now pointing to 4.6% by end-2027. However, with headline CPI still expected to peak at 4.8% in mid-2026 and the bank explicitly standing ready to move again if inflation surprises, the interest rate differential argument for AUD remains intact and could reassert itself quickly if incoming data keeps pressure on the board.
