Australian Dollar Remains Solid as RBA Keep Rates on Hold at 4.1%

April 2, 2025 - Written by David Woodsmith

STORY LINK Australian Dollar Remains Solid as RBA Keep Rates on Hold at 4.1%

The RBA paused its easing cycle and need to see more evidence of inflation stable around 2.5%.

This may come sooner than later and Westpac expect a cut in May.

Meanwhile, easing EU inflation opens the door to an ECB cut in April.

Monday’s session ended Q1 on a positive note as US stock markets managed to recover from a drop to new 6-month lows to close in the green. However, that didn’t change the complexion of the Q1 chart or the monthly chart and the bearish bias remains intact. Details of Wednesday’s big tariff announcement in the US are slowly being leaked and on Monday, White House Press Secretary Leavitt stated that the administration plans to implement “country-based” tariffs first, with additional sector-specific duties to follow later.

Meanwhile, on the separate issue of tax cuts, US Treasury Secretary Bessent mentioned that he is collaborating with Republicans in Congress to fulfill Trump’s fiscal campaign promises, including eliminating taxes on tips, Social Security, and overtime pay. Additionally, they are reportedly working on a tax cut package aimed at permanently extending Trump’s 2017 tax cuts. This would be a market positive but is being drowned out by tariff talk and is still some way off.

Tuesday’s session has started with a risk off tone as stocks are lower and the US dollar and gold are higher. Data is on the light side and the main event came from the RBA meeting in Australia which slightly lifted the Australian Dollar.

RBA Stay on Hold with a Cautious Outlook

The RBA kept rates steady at 4.1% as expected. They have only cut once so far, in February and back-to-back cuts were never really on the table as the central bank has been cautious in its approach. Having seen the Fed make aggressive cuts at the start of their easing cycle which allowed inflation and growth to bounce back strongly, they will be cautious of repeating this mistake. The key is for inflation to settle around 2.5% in the middle of the target range, as per the statement:

“The Board needs to be confident that this progress will continue so that inflation returns to the midpoint of the target band on a sustainable basis.”

Governor Bullock stated that while the Board gains confidence with each quarter that disinflation stays on track, it has not yet reached full certainty.

This view supports the Australian Dollar which made modest gains following the meeting. The bar seems quite high for further cuts, but Westpac expect data may continue to cool and lead to a another move as early as next month.

“We continue to think that further rate cuts are coming, with the next most likely in May when the RBA should be able to point to yet another pleasant surprise on inflation, just as it noted this meeting that wages growth had eased more than expected.”

Should inflation stay near 2.5%, then the bank may follow the ECB and the BoC with further cuts towards a neutral rate, but that discussion still looks some way off.

EU Inflation Eases

Following on from Germany’s lower inflation readings, Tuesday’s release of EU figures made a similar drop with headline CPI down to 2.2% from 2.3% in March. As ING point out,

“This was not just on lower energy prices, but also a pronounced decline in services inflation. Even though the latter is in part driven by a late Easter, the decline is a dovish sign for the ECB ahead of possible trade upsets to the inflation outlook.”

An April rate cut is rising in probability and the euro is reflecting this with mild relative weakness on Tuesday with a –0.28% drop against the USD and a –0.08% fall against the pound.

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TAGS: Australian Dollar Forecasts