RBA Governor Michele Bullock told a hearing the board has lifted the cash rate by 75bp this year as it seeks to steer inflation back to target. Inflation moved into the target band in early 2025, before turning higher in the second half of 2025 as stronger growth, tight labour market conditions and higher oil prices pushed up costs. She also said the Middle East conflict could add to inflation while modestly weighing on growth, and that tighter policy is already easing housing market conditions.
Bullock said headline inflation may peak above 4.5% in the June quarter, while underlying inflation is expected to remain above target until mid-2027. Separately, Australia’s international trade in goods balance improved in April, shifting to a surplus of AU$1.791bn from a March deficit of AU$1.024bn. The report stated the article was produced with the help of an Artificial Intelligence tool and reviewed by an editor.
Hawkish RBA Policy and Market Reaction
Given the RBA’s firm stance against inflation, we see a clear signal for higher interest rates. The statement that inflation won’t return to target until mid-2027 suggests a prolonged period of tight monetary policy. We should therefore be positioning for the Australian cash rate to move higher in the coming months.
The data supports this hawkish view. The latest monthly CPI indicator for April came in at a stubborn 4.1%, while the May jobs report showed unemployment holding firm at 3.9%, confirming the tight labor market conditions mentioned. These figures give the RBA little reason to pause its rate hiking cycle.
External pressures are also building, which reinforces the case for a stronger policy response. With the ongoing Middle East conflict keeping Brent crude oil prices elevated around $95 a barrel, imported inflation will remain a significant concern for the central bank. This situation makes further rate hikes seem almost inevitable.
Implications for Currency, Bonds and Property
For currency traders, this outlook strongly favors the Australian dollar. The combination of rising rate expectations and the surprisingly strong April trade surplus of A$1.79 billion creates a bullish case for the AUD, particularly against currencies with more dovish central banks. We are looking at AUD/USD call options as a viable strategy to gain exposure to this expected strength.
In the interest rate markets, the yield curve is likely to react by pricing in more aggressive RBA action. We anticipate that short-term bond yields will continue to rise in the weeks ahead. This suggests opportunities in selling Australian 3-year bond futures, betting on their price to fall as yields climb.
We must also monitor the housing market, which was noted as already cooling due to tighter policy. While the RBA is focused on inflation, a sharp downturn in property could force them to slow their pace later in the year. This represents the main risk to an overly aggressive hawkish position.
