Going into the RBA meeting, it was noted that investors should monitor any changes in rate hike expectations between the RBA and RBNZ for any opportunities in the AUDNZD. So, with the RBA hiking by a surprise 25 bps this added a further tailwind to the AUDNZD pair. It should also support dip buyers, with the RBNZ hinting that it may have reached terminal rates.

Higher inflation prompted RBA action

This was the key reason the RBA hiked rates by 25 bps. The RBA board noted that recent data had shown upside risks to the outlook for inflation. The RBA also noted that the labor market remains tight.

This makes sense, as headline inflation remains at 7% y/y and the core is at 6.6%. There has not been a clear move lower in either the headline or the core reading, which is why the RBA has acted to try and stem any further falls. Look at the core reading below, and you can see how resilient it has been. It’s over three times the 2% target, so clearly the RBA has more work to do.

More hikes to come?

The Australian Treasurer stated that the RBA rate hike reflects more persistent inflation pressures, and the Board also noted that expectations of higher inflation are contributing to larger increases in both prices and wages. Short-term interest rate markets now see a higher terminal rate of 4.27%, which is up from 4.04% a week ago. At the time of writing, there is a 55% chance of a 25bps hike expected for the July meeting.