Impact of Inflation on RBA Policy

The Reserve Bank of Australia’s (RBA) trimmed mean Consumer Price Index (CPI) for the fourth quarter is at 3.4%, higher than the expected 3.2%. This indicates increasing inflation in Australia’s economy, likely influencing the RBA’s future monetary policies. These inflation numbers come during ongoing discussions about the RBA’s interest rate strategies. Market observers are closely monitoring how the central bank responds to the current economic situation. Around the world, inflation trends and central bank actions, especially in the US, are being watched closely as they also face similar inflation challenges. As economic data shifts, analysts will be paying attention to the RBA’s moves, as these will impact the Australian dollar and overall market sentiment. This report highlights how important inflation data is in shaping monetary policy and affecting financial markets. With the trimmed mean inflation for the fourth quarter of 2025 at a surprising 3.4%, the likelihood of an RBA rate hike in February has increased significantly. The market was starting to expect a long pause, but this new data has changed the outlook. The surprise has already caused the Australian dollar to rise to 0.6750 against the US dollar.

Strategies for Investors

Overnight Index Swap markets are now predicting a 65% chance of a 25 basis point rate hike at the next RBA meeting, up from just 20% yesterday morning. This inflation report, along with last week’s strong jobs data showing unemployment steady at 3.9%, gives the RBA a solid reason to tighten policy. We believe the central bank will act to maintain its credibility on inflation. This scenario is reminiscent of 2023, when the RBA raised rates while the market anticipated a pause. That experience shows the board prioritizes controlling inflation over a slight slowdown in growth. The risk now leans toward the RBA opting for more action, not less. Thus, we should think about selling short-term interest rate futures to prepare for higher yields. In the currency market, this positive outlook makes buying the Australian dollar appealing. Purchasing AUD/USD call options would be a smart way to gain exposure while managing risk. For equities, ongoing inflation poses a challenge for the ASX 200, as higher interest rates can pressure company valuations. We should consider buying put options on the index or on sectors sensitive to rate changes, like real estate investment trusts (REITs). The increasing uncertainty in policy also points to potential market volatility, making option straddles a potentially profitable strategy. Create your live VT Markets account and start trading now.

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