RBA set to hold interest rate at 4.35% as softer inflation cools hike bets

The Reserve Bank of Australia (RBA) is set to maintain the Official Cash Rate (OCR) at 4.35% for the second straight meeting on Tuesday. The decision will be revealed at 04:30 GMT, alongside the Monetary Policy Statement (MPS) and revised economic projections. Governor Michele Bullock will deliver a press conference at 05:30 GMT.

The Australian Dollar (AUD) is expected to experience market volatility around the RBA announcement and Bullock's remarks, with traders focusing more on potential signals about the central bank's subsequent policy actions. This follows softer-than-anticipated inflation data from the second quarter, which has altered expectations of another rate hike in August.

The Australian Consumer Price Index (CPI) report indicated underlying inflation decelerating more than expected, with the Trimmed Mean CPI increasing by 0.8% quarter-on-quarter in the second quarter, below market projections for a 0.9% rise. Annual inflation only modestly accelerated to 3.6% from 3.5%, remaining below the RBA's forecast of 3.8%.

This has caused the market's probability of an August rate hike to drop to just 4%, from over 20% prior to the data release. Market sentiment suggests the RBA may adopt a more cautious stance, adhering to a data-dependent approach while evaluating whether recent easing inflation is sufficient to pause the tightening cycle.