The Reserve Bank of Australia raised the cash rate by 25 bps to 4.35% last month in an 8–1 vote, fully reversing the prior year’s easing as it continued to target persistent inflation. More recent data point to softer Australian GDP, easing headline inflation and a cooling labour market, while core inflation remains elevated. Wages were described as stagnant.
Against that backdrop, forecasts point to the cash rate being held at 4.35% at the RBA’s 16 Jun meeting, with the stance still framed by a tightening bias as policymakers assess inflation dynamics and broader conditions. The policy rate is expected to remain at 4.35% through at least 1Q27. Domestic demand is projected to continue weighing on growth, even as external demand for commodities provides some support, and the economy is expected to slow further as restrictive monetary policy filters through to households and businesses.
Implications For Rate Policy, Currency, and Fixed Income
We see the Reserve Bank of Australia holding its cash rate at 4.35% for the foreseeable future. This suggests opportunities in selling volatility on short-term interest rate futures ahead of the June 16th meeting. Low volatility means option premiums are likely to decay, benefiting sellers.
The economy is clearly slowing, with recent data showing quarterly GDP growth at a meager 0.1%, confirming that restrictive policy is working. However, with the latest quarterly inflation figures still elevated at 3.6%, well above the RBA’s target, the bank will be hesitant to signal any cuts. This extended pause should keep short-term rates anchored.
This economic environment is a headwind for the Australian dollar. A central bank on hold while others might still be considering future moves creates an unattractive setup for the currency. We believe buying AUD/USD put options is a sensible way to position for potential downside over the next few weeks.
Looking further out, the expected slowdown points towards eventual rate cuts, but likely not until 2027. This situation is reminiscent of the 2016-2018 period, when the RBA held the cash rate steady at 1.50% for two years while it assessed the economy. We might therefore consider trades that benefit from a steeper yield curve, favouring longer-dated bond futures.
Equities And Risk Management Strategies
For equities, the “high rates for longer” scenario will continue to pressure company earnings and valuations. Even with the unemployment rate having drifted up to 4.1%, it remains low enough to keep wage pressures a concern for the RBA. We see this as a time for protective strategies on the ASX 200, such as buying index put options.
