Rabobank’s Senior Market Strategist Benjamin Picton says the Reserve Bank of Australia (RBA) raised the cash rate by a third straight 25 bp, taking it to 4.35%. This matches the previous cycle high reached after supply shocks linked to COVID-19 and the Ukraine war.
RBA Governor Michele Bullock said policy is “a bit restrictive”. She said Australians are poorer because of higher oil prices.
Rba Assumptions And War Impacts
Bullock said the RBA has room to pause and assess the impacts of the Iran war on growth and inflation. The RBA’s updated projections assume the war ends soon and the Strait of Hormuz reopens.
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Looking back at late 2025, we saw the RBA hike the cash rate to 4.35% in response to the oil price shock from the Iran war. Governor Bullock’s warning that Australians were poorer and that policy was “a bit restrictive” set the stage for a significant economic slowdown. The central bank’s key assumption at the time was that the conflict would resolve quickly.
The RBA’s projection proved correct, as the Strait of Hormuz reopened by early 2026, causing oil prices to fall from their peak of over $120 a barrel. Brent crude has since stabilized, trading this week near $85 a barrel, easing the intense inflationary pressures we faced last year. This sharp reversal in energy costs has fundamentally changed the economic outlook.
Market Positioning For Lower Rates
The impact of those restrictive rates is now clearly visible in the data. The latest figures for the first quarter of 2026 showed annual CPI inflation has fallen to 3.2%, moving much closer to the RBA’s target band. Meanwhile, the unemployment rate has ticked up to 4.4% as businesses react to slowing demand.
This economic cooling has completely shifted market sentiment away from the rate hikes of 2025. Interest rate futures markets are now pricing in a high probability of at least two 25 bp rate cuts from the RBA before the end of this year. The debate is no longer about how high rates will go, but when the easing cycle will begin.
Given this outlook, traders should consider positioning for lower interest rates through instruments like Australian 3-year government bond futures (YT). As expectations for rate cuts become more concrete, the price of these futures will likely rise. This offers a direct way to speculate on the RBA’s next move.
Volatility in the equity market is also an area of focus, as uncertainty about the timing of cuts can cause sharp market swings. Using options on the ASX 200, such as buying straddles, could be an effective strategy to profit from increased market movement. This position benefits from a significant price move in either direction, capitalizing on the current uncertainty.
The prospect of RBA rate cuts while other central banks, like the US Federal Reserve, remain on hold creates a divergence that will likely pressure the Australian dollar. We should consider shorting the AUD against the USD. This can be executed through currency futures or by buying put options on the AUD/USD pair.
