The RBA meets tomorrow for its third policy meeting of the year, and most forecasts point to another rise. In a Bloomberg survey of 28 economists, 27 expect a 25 basis point increase, while 1 expects no change.
Futures markets imply about a 75% probability of a rate rise. Even so, a pause remains possible given earlier tightening, softer March data, and a split board.
Inflation Expectations And Policy Outlook
March inflation was 4.6%, above the RBA’s 2–3% target range, and it would still be above target even without energy. Melbourne Institute surveys show inflation expectations have risen to 5.9%, more than 1 percentage point higher than at the start of the year.
Second-round effects were not evident in the March inflation data. However, higher inflation expectations could increase the risk of such effects in coming months.
Recent speeches indicate RBA members have, on average, used more hawkish language in the weeks since the last rise than before it. The impact of prior rate rises may take time to flow through to the real economy.
We see a strong conviction in the market for a third consecutive rate hike from the Reserve Bank of Australia. Futures are pricing in about a 75% chance of another 25-basis-point increase. This consensus is built on inflation remaining stubbornly high and hawkish comments from the central bank.
We only need to look back to the Bank of Canada’s surprise pause in early 2025 to see how markets can react. The Canadian dollar fell over 1.5% in a single session when the market was similarly positioned for a hike. This historical precedent shows how quickly sentiment can shift when a central bank deviates from the expected path.
Trading Implications For Rates And Currency
Recent data supports this hawkish view, with the latest monthly CPI indicator for April 2026 ticking up to 4.7%, showing inflation is not yet tamed. Furthermore, the unemployment rate remains low at 3.9%, giving the RBA confidence that the economy can handle further tightening. This is a similar pattern to what we saw in other developed economies back in 2023 when they were fighting persistent inflation.
Despite the high probability of a hike, we must consider the potential for a surprise pause. The full impact of the RBA’s previous two hikes has yet to filter through to the real economy. A sudden dovish turn would catch many off guard, as the board could cite softening retail sales data as a reason to wait and see.
This setup suggests that volatility in the Australian dollar is underpriced heading into the announcement. Traders could consider buying short-dated AUD/USD options, such as a straddle, to profit from a larger-than-expected move in either direction. The risk is skewed, as a surprise pause would likely cause a much sharper drop in the Aussie dollar than the rally from an expected hike.
For those trading interest rate futures, the current pricing already reflects the expected hike. A position that benefits from a ‘no hike’ scenario, such as buying Australian 3-year government bond futures, offers an attractive risk-reward profile. If the RBA does pause, these futures would rally significantly as yields fall.
