Australian Dollar edges up, RBA hawkish hold does little to revive rate hike expectations

The Australian Dollar (AUD) experienced a slight increase against major currency peers following the Reserve Bank of Australia's (RBA) monetary policy decision, though it remained slightly lower at around 0.7050 against the US Dollar (USD) during European trading hours on Tuesday. The RBA decided to maintain the Official Cash Rate (OCR) at 4.35%, consistent with the previous meeting and indicating a willingness to consider additional rate hikes this year due to inflation risks.

RBA Governor Michele Bullock emphasized the need for further progress before being confident about the Consumer Price Index (CPI) and stated that the bank would raise rates again if necessary. Despite the RBA's governor stressing a potential rate hike, market experts interpreted the decision as indicating a weak appetite for further tightening.

TD Securities noted that the RBA "kept the cash rate on hold at 4.35% as expected in a unanimous decision," with the statement being less hawkish than anticipated. This led TD to conclude that a rate hike was not the bank's central forecast, implying a less hawkish stance and a lifted bar for a follow-up rate hike this year. However, TD cautioned that the RBA is not out of the woods, citing trimmed mean CPI forecasts for Q3 and Q4 showing a 0.8% quarter-over-quarter increase.

Analysts at Ernst & Young (EY) also cautioned against interpreting the decision as an all-clear for inflation, stating that the Reserve Bank remains alert to upside risks and ready to respond. Commerzbank echoed similar sentiments, with their updated projections showing a softer near-term backdrop and revised inflation forecasts, reinforcing the possibility of further interest rate hikes later in the year.

Overall, macroeconomic data and various indicators suggest a need for a stronger economy to support the RBA's decision to maintain interest rates, which in turn boosts the AUD's value.