- The Reserve Bank of Australia is expected to trim the OCR by 25 bps.
- RBA Governor Michele Bullock likely to address tariff concerns.
- The Australian Dollar could fall to fresh multi-week lows on a dovish outcome.
The Reserve Bank of Australia (RBA) is holding a monetary policy meeting on Tuesday and is set to lower the Official Cash Rate (OCR) by 25 basis points (bps) to 3.60% from 3.85%. The July monetary policy announcement will take place on Tuesday at 04:30 GMT.
The RBA will also release the monetary policy statement, a document that details policymakers’ views on current economic conditions, and an outlook detailing what they expect for the upcoming months. Finally, RBA Governor Michele Bullock will offer a press conference.
Ahead of the announcement, the Australian Dollar (AUD) weakens against its American rival, as the US Dollar (USD) gathers demand from a risk-averse environment.
Focus on RBA’s next interest rate move
Recent growth and inflation data have been softer than expected, supporting the case for a rate cut.
The Monthly Consumer Price Index (CPI) is an annualised inflation estimate, which printed at 2.1% in May, easing from the 2.4% posted in April and below the 2.3% anticipated. The Australian Bureau of Statistics (ABS) also reported that the RBA Trimmed Mean CPI grew 2.4% on an annualised basis, softer than the previous 2.8%, and the lowest level since November 2021.
At the same time, Australia reported that the economy grew by less than expected in the first quarter of the year, advancing 1.3% year-on-year (YoY) compared to the 1.5% gain anticipated. In the three months to March, the economy expanded 0.2%, half the 0.4% expected.
Softer inflation, coupled with tepid growth, supports another interest rate cut, particularly as the RBA has maintained a cautious wait-and-see stance for much longer than any other central bank.
The third leg of the equation, the labour market, has been somewhat strong. According to the latest monthly employment report released by ABS, the Unemployment Rate held steady at 4.1%. The country lost 2.5K job positions in May, albeit the big loss came from part-time jobs, down by 41.2K, while full-time positions increased by 38.7K. The labour market strength, however, is not enough to push the Board into a wait-and-see stance.
Uncertainty about tariffs adds spice to the announcement, as well as the planned trimming. At the May meeting, policymakers debated whether to cut by 25 or 50 basis points (bps), ultimately opting for the smaller reduction. Ahead of the announcement, financial markets are also considering a modest 15 bps trim.
The expected 25 bps reduction may sound encouraging for financial markets, but it does little for households. High mortgage rates have been a key factor in the slow growth, and the cautious rate cuts delivered by the RBA have done little to boost consumption.
In the meantime, market concerns revolve around US President Donald Trump’s tariffs. US Secretary Scott Bessent stated that President Trump will send letters to some trading partners, indicating that increased levies will be implemented on August 1 if there is no progress in negotiations. Bessent added he expects to see “several big announcements over the next couple of days” about trade deals.
How will the Reserve Bank of Australia decision impact AUD/USD?
Market players will be looking for RBA Governor Michele Bullock’s words on tariffs and future monetary policy decisions. Interest rate cuts are somehow conditioned by US President Trump’s tariffs, as the world fears that levies would boost inflation.
In the meantime, the AUD/USD pair trades a handful of pips above the 0.6500 mark, after falling towards 0.6482 at the beginning of the day. Easing interest rates are usually dovish and weigh on the affected currency, yet a 25 bps rate hike is fully priced in. With that in mind, the announcement itself should have a limited impact on the pair, unless the RBA goes for a larger or smaller trim. The pair could react to Bullock’s words on whatever the Board plans for the near future.
Valeria Bednarik, Chief Analyst at FXStreet, notes: “The AUD/USD pair trades with a soft tone, and regardless of the intraday bounce from fresh lows, the risk skews to the downside. Resistance comes at 0.6530, en route to the 0.6570 price zone, where sellers are likely to reappear. A slide through the intraday low exposes the 0.6440 region, while additional slides could see the pair testing the 0.6400 mark.
Bednarik adds: “Regardless of the RBA announcement and the AUD/USD pair’s initial reaction, it seems unlikely that the central bank will overshadow ongoing tariff-related concerns. Markets will return to trade on sentiment after digesting the RBA decision and quickly pricing in the next one.”
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.
Economic Indicator
RBA Monetary Policy Statement
At the end of each of the Reserve Bank of Australia (RBA) eight meetings, the RBA’s board releases a post-meeting statement explaining its policy decision. The statement may influence the volatility of the Australian Dollar (AUD) and determine a short-term positive or negative trend. A hawkish view is considered bullish for AUD, whereas a dovish view is considered bearish.
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