UBS said it expects the Reserve Bank of Australia to raise interest rates in August after a series of inflation surprises, and that the Australian dollar (AUDUSD) is likely to benefit from such a scenario in the longer term.
Australia’s inflation rate has unexpectedly risen for three straight months, raising expectations that the Reserve Bank of Australia will have to do more to bring inflation down. The consumer price index rose to 4% in May, well above the RBA’s annual target of 2% to 3%.
UBS expects the RBA to raise interest rates by 25 basis points to 4.6% if the second-quarter CPI shows at least a 1% increase on a quarterly basis.
But alongside the CPI data, UBS claimed that strong retail sales and employment data could also prompt the RBA to raise interest rates.
“The more important question is whether the data has surprised the RBA enough to raise interest rates again,” UBS analysts wrote in a note. They also forecast the RBA’s rate cut plans to be delayed to April 2025 from February 2025.
To this end, UBS has forecast a long-term positive trend for the Australian dollar, specifically the pair. UBS expects the pair to reach $0.68 by December, and $0.70 by June 2025.
But they warned that the currency still faced some downside risks at $0.66, its current level. They also recommended holding on to the AUD/NZD, targeting $1.15 over the next 12 months.