The Reserve Bank of Australia (RBA) increased its cash rate by 25 basis points to 4.10% in a closely contested 5-4 decision, marking the first consecutive rate hike since 2023 [1]. The move was primarily driven by persistently high domestic inflation and excess demand, with the Board noting that inflation is likely to remain above target for some time and that risks have tilted further to the upside, particularly regarding inflation expectations [1]. TD Securities strategists Prashant Newnaha and Alex Loo highlighted that speculation about the Middle East conflict influencing the hike was unfounded; the decision was based on economic fundamentals rather than external geopolitical factors [1].
The Board observed that the labor market has tightened recently and capacity pressures are slightly greater than previously assessed, suggesting that the recent uptick in inflation is due to stronger demand momentum rather than temporary factors [1]. Despite the fundamental risks favoring another rate hike, the narrow margin of the vote introduces uncertainty about the likelihood of a further increase in May. The RBA Governor emphasized in the press conference that the decision was 'very very close,' underscoring that a May hike is not guaranteed [1].
TD Securities maintains a bias toward re-engaging into flatteners in rates, citing a positive terms of trade shock and increased hedging activity from Australian pension funds as supportive of a bullish AUD outlook [1].
CONCLUSION
The RBA's 25bps rate hike to 4.10% was driven by elevated inflation and excess demand, but the narrow 5-4 vote signals uncertainty about future policy moves. While risks still favor another hike, the outcome in May remains unclear, with market participants watching inflation expectations and labor market dynamics closely.