RBA Governor Bullock discusses interest rate outlook after the extended pause

The Reserve Bank of Australia left the cash rate unchanged at 3.60% in a unanimous December decision and Governor Michele Bullock signalled a meeting‑by‑meeting, data‑dependent approach—saying rate cuts are not on the horizon, no explicit case for a hike was considered at this meeting, but risks to inflation have tilted to the upside and the board will act if inflation proves persistent. Recent upside surprises in domestic data—Q3 GDP +2.1% y/y, October CPI 3.8% y/y and wage growth at 3.4%—have prompted markets to push back expectations for easing and to price a possible hike by end‑2026, increasing the likelihood of a hawkish tilt ahead. The announcement triggered near‑term AUD volatility (AUD/USD recovered to about 0.6625 after an initial selloff), and further hawkish language from the RBA could lift the AUD and reshape rate expectations, while a continued data‑dependent stance would keep policy risk and FX volatility elevated for investors.

Analysis

The Reserve Bank of Australia left the Official Cash Rate unchanged at 3.60% in a unanimous December decision and Governor Michele Bullock emphasised a meeting‑by‑meeting, data‑dependent approach, stating rate cuts are not on the horizon while not explicitly making a case for a hike at this meeting. Recent Australian data underpinning that stance include Q3 real GDP growth of +2.1% year‑on‑year, October CPI at 3.8% y/y and annual wage growth steady at 3.4%, which together have prompted markets to shift expectations toward a possible hike by end‑2026. The RBA noted private demand is recovering and labour market conditions remain a little tight, while judging some recent rises in underlying inflation as partly temporary but flagging upside risks to inflation. The announcement produced immediate FX volatility—AUD/USD briefly sold off then recovered to ~0.6625 (+0.06% on the day)—and the bank’s defensive, data‑driven language implies elevated near‑term FX and policy risk ahead of February, with clear technical reference points cited for AUD/USD momentum trades.

Key Decisions for Investors

• Consider modest long AUD/USD exposure if RBA communication tilts hawkish, using resistance near 0.6707–0.6750 as profit targets and placing risk limits below the 0.6530 confluence of 50/100‑day SMAs
• Trim or avoid positions that assume imminent RBA rate cuts and reposition fixed‑income duration exposure in AUD markets for an extended pause or the potential for eventual tightening
• Monitor February inflation and labour market data and any RBA forward guidance as primary catalysts; use options or dynamic hedges to protect against elevated FX volatility
• If trading AUD, treat 0.6600 as the first material support and 0.6553/0.6530 as critical downside thresholds that would materially change the tactical view