AUD: Inflation Sticky, RBA Holds Steady – Commerzbank

Despite Australia's July CPI easing to 3.5% year-on-year, the data offered little comfort to the Reserve Bank of Australia (RBA). Commerzbank analyst Volkmar Baur notes that the trimmed mean inflation rate, excluding volatile items, remains stubbornly at 3.6%, indicating that underlying price pressures have not been effectively alleviated. This leaves the RBA in a wait-and-see mode regarding inflation and labor market developments after three rate hikes.

**Inflation Easing Misses Expectations, Hawkish Tone Likely to Persist**

The slowdown in inflation fell short of market expectations, which is the core reason for the RBA's cautious stance. Baur expects the RBA to hold the cash rate steady at its upcoming September meeting, but the policy statement may carry a hawkish tone, emphasizing that the fight against inflation is not yet complete. Market signals show that RBA Governor Michele Bullock has previously indicated that further rate hikes cannot be ruled out. This "holding steady but leaning hawkish" posture reflects the central bank's difficult balancing act between curbing inflation and avoiding excessive economic cooling.

**Core Inflation Shows Stickiness, Rate Hike Threshold Remains High**

Despite hawkish rhetoric, market participants remain divided on whether the RBA will actually deliver another rate hike. Baur himself is skeptical. The key issue is that while headline inflation has fallen from its peak, the trimmed mean inflation rate remains elevated, highlighting the breadth and stickiness of inflationary pressures. However, the labor market has shown signs of cooling, which raises the bar for resuming rate hikes. Unless underlying inflation unexpectedly surges, the RBA is more likely to maintain current elevated interest rates for an extended period rather than resort to further tightening.

**AUD Supported, Rate Cut Expectations Distant**

Under this policy outlook, the Australian dollar is likely to remain supported in the near term. Commerzbank economists believe that only a more significant decline in inflation would prompt the RBA to gradually abandon its cautious stance. Currently, market expectations for RBA rate cuts are very distant, contrasting with the policy paths of other major central banks, providing the AUD with a certain yield advantage. At the time of writing, AUD/USD was trading around 0.7179.