UBS's New Rate Hike Forecast#
UBS has updated its expectations for the Reserve Bank of Australia's (RBA) interest rate decisions. The bank now anticipates a 25 basis point increase at the RBA's meeting on May 5, followed by another hike in August. This would raise the cash rate to 4.6%. A basis point is one-hundredth of a percentage point, so a 25 basis point increase means rates would go up by 0.25%.
Inflation Data Insights#
The adjustment in UBS's forecast comes after the release of trimmed mean Consumer Price Index (CPI) data, which showed a slight unexpected decrease. However, year-over-year inflation figures indicate that price pressures remain strong. UBS noted that underlying inflation, which excludes volatile items like food and energy, continues to be robust, suggesting that the RBA's efforts to control inflation are ongoing.
RBA's Stance on Inflation#
The RBA has maintained a tightening bias, meaning it is inclined to raise interest rates to combat high inflation. Recent data supports this approach, as the central bank continues to face elevated inflation levels throughout the Australian economy.
Outlook for the Australian Dollar#
UBS has expressed caution regarding the Australian dollar (AUD) in the short term, primarily due to the strength of the U.S. dollar. The bank projects the AUD/USD exchange rate to reach 0.70 by the end of June. However, looking ahead to the next 12 months, UBS is more optimistic about the Australian dollar, setting a target of 0.75, particularly favoring selective currency pairs.