The Governor of the Reserve Bank of Australia (RBA) has observed that inflation is rising more than expected, and if this trend continues, it could lead to changes in policy. The output gap might be closed, and the job market continues to be tight, although some inflation increases are only temporary. The Australian Dollar (AUD) could strengthen if interest rates go up. As of now, the AUD/USD is trading 0.13% higher at 0.6574. The RBA aims for stability with an inflation target of 2-3% and influences the AUD through interest rates as well as strategies like quantitative easing or tightening.

Quantitative Easing and Tightening

Quantitative easing occurs when the RBA prints AUD to buy assets, which tends to weaken the currency. On the other hand, quantitative tightening stops asset purchases, which may increase the value of the AUD. Economic data, like GDP and employment rates, impact the AUD as they reflect economic health and growth, attracting more investment. Inflation data also plays a role. If inflation leads the RBA to change interest rates, it could draw in international capital. If inflation expectations stay stable, the RBA plans to keep the currency steady while fostering economic growth. The board of governors makes these decisions during regular and emergency meetings. The Reserve Bank of Australia is signaling that its patience with inflation is fading. Governor Bullock’s remarks indicate that if inflation continues stubbornly, policy adjustments will be considered. This clearly suggests that another interest rate hike could be on the horizon.

Recent Inflation and Labor Market Data

We should examine the recent data driving this outlook. The latest monthly CPI for October 2025 showed a surprising 3.8%, higher than the expected 3.5%. This unexpected rise is what the RBA is closely monitoring. A tight labor market, with the unemployment rate low at 3.7% in October 2025, adds to inflation pressures. A similar situation occurred in 2023 when ongoing inflation and a robust job market compelled the RBA to take action after a pause. We should not underestimate their determination to respond. For derivative traders, this situation makes strategies that capitalize on a stronger Australian dollar and rising interest rates more appealing. The market now anticipates a greater than 70% chance of a 25 basis point rate hike at the February 2026 meeting, making call options on the AUD and fixed interest rate swaps more attractive. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now