Australian Dollar Declines Despite Interest Rate Hike to 4.85% – Why?
The Australian dollar fell against most major currencies during Tuesday’s trading, despite the Reserve Bank of Australia’s (RBA) decision to raise interest rates for the fifth time this year.
While the move was in line with market expectations, it failed to provide the anticipated support for the currency, as a division emerged within the bank’s board regarding the continued tightening of monetary policy.
The Australian dollar dropped by more than 0.5% to reach approximately 0.6965 US dollars, marking its second consecutive session of losses. Investors interpreted the split vote on the rate hike as a sign of growing caution within the central bank regarding further monetary tightening in the near term.
Reserve Bank of Australia Raises Interest Rates to 4.85%
At the conclusion of its November monetary policy meeting, the Reserve Bank of Australia decided to raise its key interest rate by 25 basis points to 4.85%—the highest level since 2008.
The decision was driven by persistent inflationary pressures; notably, core inflation rose to 3.7% in the third quarter, exceeding the central bank’s target range of 2% to 3%.
Although the rate hike was widely anticipated, the division among board members proved to be the primary factor behind the Australian dollar’s decline.
Three out of the nine board members opposed the increase, raising questions about the bank’s willingness to continue its monetary tightening cycle.
Division Among Central Bank Members Damps Expectations for Further Interest Rate Hikes
The latest decision has led investors to scale back their bets on another interest rate hike in Australia in the near term.
Market expectations for a further 25-basis-point increase—which would bring the rate to 5.10%—have fallen to approximately 24%, down from about 40% prior to the central bank's announcement.
This decline in expectations for monetary tightening reflects a market belief that the central bank may be nearing the end of its interest-rate-hiking cycle, particularly amid growing concerns that high borrowing costs could slow economic activity and negatively impact growth.
Analysts suggest that the Reserve Bank of Australia (RBA) may opt to hold interest rates at their current levels for an extended period, with no expectation for a rate-cutting cycle to begin before late next year.
Comments from RBA Governor Michele Bullock
Reserve Bank of Australia Governor Michele Bullock emphasized that the bank has not committed to a specific path for its next interest rate move, noting that closely monitoring incoming economic data is the most appropriate course of action at this stage.
During a press conference following the announcement, Bullock explained that tightening monetary policy was necessary to curb domestic inflationary pressures and prevent economic demand from exceeding the Australian economy's productive capacity.
It added that returning inflation to the target level requires sustained, moderate economic growth, alongside an increase in the unemployment rate in the coming period.
It further warned that persistent inflationary pressures could lead to greater long-term economic costs.
Inflation forecasts weigh on the Reserve Bank of Australia’s decisions
In its economic outlook report released alongside its monetary policy decision—the Reserve Bank of Australia (RBA) raised its inflation projections, noting that price pressures may persist longer than previously anticipated.
The Bank’s estimates suggest that both headline and core inflation could remain above 3% until late 2027, even assuming that interest rates are held at their current levels for an extended period.
These forecasts highlight the difficulty of returning inflation to the target range in the near term, presenting the central bank with the challenge of balancing the need to contain rising prices with the goal of maintaining stable economic growth.
Outlook for the Australian Dollar
Movements in the Australian dollar are likely to remain tied to interest rate expectations, as well as data on inflation and economic growth in Australia. Furthermore, the currency will be influenced by the policies of major central banks, most notably the U.S. Federal Reserve.
A decline in the likelihood of further interest rate hikes could keep the Australian dollar under pressure particularly if the central bank opts to maintain current interest rates for an extended period rather than continuing with monetary tightening.
Conversely, high inflation levels could provide some support for the Australian dollar if they prompt the central bank to keep interest rates elevated for longer than anticipated.
Consequently, the tone of the Reserve Bank of Australia and upcoming economic data will remain key factors in determining the direction of the Australian dollar against the US dollar in the period ahead.
