NEWS

The Australian dollar surged across the board on Tuesday, rebounding sharply from a two-week low against the US dollar, after the Reserve Bank of Australia (RBA) surprised markets by leaving the official cash rate unchanged at 3.85%. This unexpected move came despite widespread expectations of a rate cut of at least 25 basis points.

The decision sent shockwaves through the financial markets, as many traders had positioned themselves for an imminent rate reduction amid slowing inflation and weaker economic growth. However, the RBA opted for a cautious approach, emphasizing the need for further data before making any significant policy changes.

Aussie Dollar Jumps on Policy Surprise

In currency markets, the AUD/USD pair climbed by 0.95%, reaching 0.6559, after opening the session at 0.6497 and touching an intraday low of 0.6491. This strong rebound follows Monday’s 1.0% drop in the Australian dollar — its third consecutive daily loss — which saw the currency hit a two-week low of 0.6485.

RBA Maintains Rates Despite Market Expectations

The RBA’s decision to hold rates steady diverged sharply from consensus forecasts, which had priced in a 25 basis-point cut to 3.60%. According to the bank’s statement, six board members voted in favor of keeping rates unchanged, while three voted for a cut, reflecting a rare split among policymakers and underscoring the uncertainty surrounding the inflation outlook.

"The Board judged that it could wait for further information to confirm that inflation is on a sustained path back to the 2.5% target," the RBA said. The central bank also noted that the current monetary policy stance is well-positioned to respond decisively to global or domestic developments if they materially affect inflation or economic activity.

Inflation Data Still a Concern

While the latest monthly Consumer Price Index (CPI) readings suggest inflation in the June quarter may align broadly with expectations, the RBA acknowledged that inflation was slightly stronger than anticipated on the margin. This has led the bank to adopt a wait-and-see approach, rather than acting prematurely.

Market Outlook for Interest Rates

Following the announcement, interest rate swap markets now price in a total of 50 basis points of rate cuts by the end of the year — a revision from earlier forecasts that anticipated more aggressive easing. Additionally, the probability of a rate cut in August has dropped from 65% to 50%, signaling increased uncertainty in the monetary policy outlook.

Conclusion

The RBA’s decision to hold interest rates steady, despite clear market expectations of a cut, has bolstered the Australian dollar in the short term. As investors assess future policy moves, the focus will remain on inflation data, wage growth, and global economic conditions. The divergence among board members also highlights the growing complexity of policy decisions amid persistent inflationary pressures and global volatility.