RBA rate hike bets surge as Australian inflation heats up
Australia's inflation problem extends well beyond energy, with markets now pricing further RBA hikes into 2027. So why has AUD/USD reversed sharply after its initial surge?
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Australia's Q3 inflation report has strengthened the case for another RBA rate increase, with trimmed mean inflation rising 1%, in line with market expectations but two-tenths above the bank's forecast. Annual underlying inflation now stands at 3.66%, with the six-month annualised pace running at 3.7%, both miles above the RBA's 2.5% target midpoint.
But what's happening beneath the headline figures?
Our analysis shows inflation pressures remain widespread, while comparisons between market goods and services, tradables and non-tradables, and discretionary and non-discretionary spending reveal where price pressures are proving most persistent.
Interest rate traders have responded by pricing an 85% chance of a 25 basis point RBA hike in November, with the OIS curve implying further tightening into 2027.
As discussed in the video below, despite the shift in rate expectations, AUD/USD has struggled to maintain its post-inflation rally with the price action turning cautious ahead of the Fed's policy decision later in the session.
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