RBA preview: rate hike unlikely, but hawkish hold on tap amid sticky inflation

Investing.com-- The Reserve Bank of Australia is widely expected to keep interest rates unchanged at the conclusion of a meeting on Tuesday, especially after recent inflation data showed mild cooling.

But given that inflation remains well above the RBA’s 2% to 3% annual target range, the central bank is expected to provide some hawkish signals, and is likely to signal rates will remain high for longer. 

The RBA is likely to hold its benchmark cash rate at 4.35%.

Consumer price index inflation data for the second quarter rose in line with the central bank’s forecasts. But underlying inflation unexpectedly slowed, while monthly CPI inflation was also seen easing.

The mildly softer inflation readings give the RBA less impetus to hike- a move that analysts were speculating over after higher inflation readings through most of the second quarter. 

Inflation also remained well above the RBA’s annual target range, giving the bank more cause to keep rates high for longer. 

RBA set for hawkish hold 

While the central bank is not expected to hike rates, it is still expected to put up a hawkish stance, given that Australian inflation remains relatively sticky.

Governor Michele Bullock is likely to flag high-for-longer rates during her press conference after the meeting, and is also expected to provide an updated forecast for the RBA’s outlook on inflation. 

“We expect the Board to consider both an increase in the cash rate and ‘no change’, with the no change case to prevail,” analysts at ANZ wrote in a note. ANZ only expects the RBA to begin cutting rates by February 2025.

How will the ASX 200, Australian dollar react?

Any hawkish signs from the RBA are likely to further batter Australian stocks, with regional markets already nursing steep losses from a broader risk-off sentiment.

The ASX 200 fell sharply in recent sessions after hitting record highs as recently as last week. 

High-for-longer interest rates bode poorly for most Australian businesses, especially given that they are already grappling with weak overseas demand. 

Australian bank stocks, however, may take some support from the prospect of high rates.

The Australian dollar is likely to benefit from any hawkish signals, and could rebound from sharp losses in recent sessions. Soft inflation data from last week and a broader risk-off sentiment had seen the AUDUSD pair plummet to three-month lows in recent sessions.