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Aussie inflation is too hot to allow for further rate cuts at the Reserve Bank of Australia (RBA).
AUD outperformed the majority of its G10 peers in midweek trade courtesy of above-consensus inflation numbers.
Headline CPI rose 3.8% year-on-year in October, above expectations for 3.6% and making for the highest rate since mid-2024.
The trimmed mean measure of core inflation - which the RBA is arguably more concerned about - rose 3.3%, putting it above the Reserve Bank of Australia’s (RBA) 2–3% target.
The RBA kept the cash rate at 3.60% earlier this month, signalling caution over the trajectory of domestic inflation.
A stronger AUD reflects a market that is readjusting its expectations for further RBA interest rate cuts, judging them to be less likely.
"Australia’s rate market... is coming round to the idea that rates might be higher by this time next year. That makes AUD look absurdly cheap," says Kit Juckes, FX analyst at Société Générale.
Following the data, the Australian dollar rose half a per cent against the U.S. dollar to reach 0.65, while the pound-Australian dollar conversion eased back to 2.0272, having been as high as 2.0474 just yesterday.
Image courtesy of AMP.
"With inflation sticky and demand near capacity, rate cuts will be delayed, though we expect two 25 bps cuts by 1H26 if disinflation takes hold. The bigger challenge ahead will be reviving consumer demand," says Lee Sue Ann, an economist at UOB.
"The RBA does not expect a significant easing of annual inflationary pressures in early 2026 due to demand running close to the economy’s capacity to supply goods and services," she explains.
Diana Mousina, Deputy Chief Economist at AMP in Sydney, expects inflation to slow from here.
"The signal from the various forward-looking price indicators in business indicators (like the PMIs) and NAB business survey are a little softer. An elevated (and increasing) unemployment rate will put downward pressure on wage growth and should help to ease services inflation," she explains.
AMP expects trimmed mean inflation to be around 2.5% by the second half of 2026, indicating that a disinflationary trend will possibly transpire next year.
If so, the RBA might find itself in a better position to cut rates.
For now, however, the signals from the inflation and interest rate expectation front are ones of caution.
All else equal, this is supportive of the Aussie dollar until such a time as a disinflation process is confirmed by the data.