Key Moments
- The Reserve Bank of Australia (RBA) raised the cash rate by 25bp to 3.85%, its first increase since November 2023.
- Updated RBA projections show trimmed mean inflation staying above the 2.5% target midpoint through mid-2028, even with a cash rate peak of 4.3% in late 2027.
- AUD/USD climbed back above 0.7000 following the decision, with markets pricing in multiple additional rate hikes this year.
Policy Decision Signals Renewed Tightening Cycle
The RBA resumed rate hikes, lifting the cash rate by 25 basis points to 3.85%. This was the first increase since November 2023. While expected, the accompanying forecasts sharpened market focus. Investors are now preparing for a longer tightening phase as Governor Michele Bullock addresses the press at 3:30 pm.
The move reflects the RBA’s concern about persistent inflation. Updated projections point to price pressures that are proving difficult to tame. This leaves the door open for multiple additional rate increases and highlights the importance of upcoming central bank communications.
Hawkish Shift on Inflation, Labor, and Capacity
Compared with December, the February statement shows a more hawkish tone on inflation. The Board now says inflation “picked up materially in the second half of 2025” due to “greater capacity pressures.” It also notes inflation is “likely to remain above target for some time.”
The labor market description has changed. Conditions are still “a little tight,” but now unemployment is “a little lower than expected.” Previous references to easing momentum have been dropped.
On supply-side capacity, the Board now explicitly states that growth in the economy’s “supply capacity remains limited” and pressures are “greater than previously assessed.” What was once framed as a risk is now an active constraint.
The RBA also upgraded its growth assessment. Private demand has strengthened “substantially more than expected” and is “growing more quickly than expected,” reflecting rising capacity pressures.
Forecasts Point to Sticky Inflation and Extended Tightening
Updated projections suggest a longer tightening cycle than a single 25bp hike. Trimmed mean inflation is not expected to return to the 2.5% midpoint of the 2-3% target band by mid-2028. This includes assumptions for a stronger Australian dollar, lower crude oil prices, and a peak cash rate of 4.3% in late 2027.
Trimmed mean inflation is projected at 0.9% for each of the next two quarters, indicating slow disinflation. With the cash rate at 3.85%, the RBA may ultimately reverse all three rate cuts from 2024.
GDP growth forecasts have been lowered to 1.6% from mid-2025, down from an earlier 2%. Unemployment is expected to drift to 4.6% by mid-2028, though the outlook for this year has been trimmed slightly to 4.3%.
The RBA notes its forecasts use market-implied interest rates, signaling that achieving the inflation target may require more than a single rate rise.
Summary of RBA Macro Projections
| Indicator | Latest Forecast |
|---|---|
| Cash rate (assumption) | Peaks at 4.3% in Q4 2027 |
| Trimmed mean inflation | Above 2.5% midpoint of target through mid-2028; 0.9% in next two quarters |
| GDP growth | Slows to 1.6% from mid-2025 (was 2%) |
| Unemployment rate | Rises to 4.6% by mid-2028; 4.3% forecast for this year |
Market Pricing Shifts Toward Multiple Hikes
Markets reacted quickly to the RBA’s hawkish stance. Swaps pricing shows an 89% chance of another 25bp hike by the May meeting, after first-quarter inflation data. Historically, the RBA tends to deliver multiple moves early in a tightening phase.
By the August meeting, after second-quarter inflation figures, markets see roughly a two-in-three chance of another hike, taking the cash rate to 4.35%. This aligns with stronger-than-expected recent data.
The ultimate number of hikes depends on federal budget outcomes, labor market developments, and global conditions. A neutral policy setting, where inflation and unemployment are stable, may be above the current rate. This increases the chance the RBA will tighten more than current market pricing implies.
AUD/USD Rallies Through 0.7000 on Hawkish Surprise
The RBA’s move pushed AUD/USD above the 0.7000 level. Technical indicators confirm bullish momentum, with the 14-period RSI and MACD pointing higher.
Bulls now watch for a retest of the January 29 peak at 0.7094. The focus increased after a failed downside break below the October 2024 high, which formed a hammer pattern on the daily chart.
Domestic conditions show few negatives, but fragile global risk sentiment could cap gains. A sustained move above 0.7094 could target the February 2023 high at 0.7250-0.7280, a key resistance zone.
On the downside, initial support is at 0.6943. Further levels include 0.6900 and 0.6800. Current technicals favor buying dips rather than chasing strength at higher levels.
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