Investing.com — The Reserve Bank of Australia is widely expected to keep interest rates steady on Tuesday, although investors were cautious about the bank taking a hawkish stance amid signs of steady inflation.
The Reserve Bank of Australia is widely expected to keep interest rates at 4.35%, leaving them unchanged for the fourth straight meeting since raising interest rates in November.
While the bank has eased its hawkish forecasts in recent months, analysts warned that the stronger-than-expected inflation reading for the first quarter could now put some hawkish language back on the table.
The Reserve Bank of Australia (RBA) is hawkish, but raising interest rates will take much more than that
The RBA is now widely expected to at least reiterate that interest rates will remain high for longer, especially with inflation moving away from its 2% to 3% annual target rate in the first quarter.
While inflation has eased significantly from 30-year highs through 2023, fixed service costs and relatively strong consumption have halted this deflationary trend in recent months.
“Although we do not expect the Governing Council to explicitly discuss a rate hike, communications on Tuesday will be tighter than in March,” ANZ analysts wrote in a note.
“We still see the first rate cut in the shallow easing cycle in November, although, as we noted after CPI, there is a risk of this being pushed into next year.”
Analysts at Westpac said that while a scenario in which the RBA threatens to raise interest rates is not impossible, it appears unlikely now and is likely to come later in the year if inflation remains steady.
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But Westpac analysts also said such a scenario did not look likely, and they expected the RBA's next move to be a cut, albeit later in the year.
In the near term, Australian interest rates are expected to remain high, with the Reserve Bank of Australia likely to signal this on Tuesday.
How will the ASX 200 react?
Australian stock markets, specifically the benchmark index, are likely to fall in the face of any hawkish signals from the Reserve Bank of Australia, especially if the central bank repeats its threat to raise interest rates.
But even the prospect of higher interest rates in the long term bodes poorly for local stocks, since such a scenario portends weaker domestic revenues and limits investment.
Bank stocks may see some strength on the back of potential interest rate hikes, although this trend is also expected to be offset by weaker credit activity.
How will the Australian dollar react against the US dollar?
The Australian dollar is likely to see some strength on a hawkish Reserve Bank of Australia, with the pair poised to rise.
The AUD/USD pair rose 0.1% on Monday and traded near a two-month high. Expectations of hawkish Reserve Bank of Australia, coupled with recent weakness in the US dollar, have led to strong gains for the AUD/USD over the past three sessions.
