SKN | ING Sees Australian Dollar Recovery as RBA Signals Pause With Hawkish Bias

Key Points

• ING Group expects the Australian dollar to rebound despite a short-term post-decision dip.
• The Reserve Bank of Australia raised rates to 4.35% in a stronger-than-expected 8-1 vote.
• ING believes the RBA is likely to pause in June while retaining flexibility for further tightening if inflation rises again.

ING Group, the 8-1 vote signaled stronger conviction from policymakers and reinforced the RBA’s commitment to controlling inflation despite slowing economic growth.

Growth Outlook Weakens

While the rate hike reflected ongoing inflation concerns, the central bank simultaneously lowered its economic growth projections. GDP growth forecasts for 2026 were reduced to 1.3%, while unemployment expectations were revised higher to 4.6% by the end of 2027. ING interpreted these revisions as evidence that the RBA is becoming increasingly cautious about the impact of higher rates on economic activity. The downgrade also reflects pressure from weaker consumer conditions and broader geopolitical disruptions affecting global markets.

Inflation Still a Concern

Despite weaker growth expectations, inflation remains above target. The RBA slightly increased its trimmed mean inflation forecast, while headline inflation is still expected to remain elevated before gradually returning toward target levels over the coming years. ING Group noted that the central bank continues to maintain a hawkish bias, signaling it remains prepared to tighten further if inflation data surprises to the upside.

Policy Now Viewed as Restrictive

ING highlighted that the RBA now sees the current cash rate as sitting near the upper range of neutral-rate estimates. This suggests policymakers believe monetary policy is already restrictive enough to slow demand and inflation without necessarily requiring immediate additional hikes. As a result, ING expects the central bank to remain on hold at its June meeting unless inflation accelerates materially.

ING Sees Australian Dollar Rebound

Although the Australian dollar weakened immediately after the announcement, ING Group believes the decline is likely temporary. The firm argues that the RBA’s willingness to maintain a hawkish stance should provide ongoing support for the currency, particularly if markets continue pricing in the possibility of future tightening. This positioning could help stabilize and strengthen the Australian dollar once investors fully absorb the policy outlook.

Market Implications

The combination of restrictive policy, slowing growth, and persistent inflation creates a complex environment for markets. For currency investors, the RBA’s stance may continue supporting the Australian dollar relative to currencies backed by more dovish central banks. However, weaker economic growth could limit upside momentum if domestic demand deteriorates further.

Outlook

ING Group expects the RBA to pause near term while maintaining flexibility to respond to inflation risks. Going forward, inflation data, labor market conditions, and geopolitical developments will likely determine whether Australia’s tightening cycle has reached its peak or whether further policy action becomes necessary.

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