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The Reserve Bank of Australia (RBA) is widely expected to raise the Official Cash Rate (OCR) to 3.85% from 3.6% after concluding its first monetary policy meeting of 2026.
The decision will be announced on Tuesday at 03:30 GMT, accompanied by the Monetary Policy Statement (MPS) and the quarterly economic forecasts, followed by RBA Governor Michele Bullock’s press conference at 04:30 GMT.
The Australian Dollar (AUD) is set to rock in reaction to the RBA policy announcement and updated economic projections.
RBA is set to break the global easing trend
The RBA is on track to deliver its first interest rate hike in more than two years when it meets on Tuesday for its February monetary policy meeting, ditching the global easing trend in an attempt to curb the rising inflationary pressures.
During the press conference following the December monetary policy decision, Governor Michele Bullock explicitly said, “the Board will do what it needs to do to get inflation down,” adding that “If data suggests inflation is not slowing, that will be considered at the Feb board meeting.”
Data from the Australian Bureau of Statistics (ABS) showed last Wednesday that the monthly Consumer Price Index (CPI) leaped to 3.8% in December from 3.4% in November and above forecasts of a 3.6% rise.
The trimmed mean CPI, the RBA’s closely watched measure of core inflation, rose 0.9% quarterly in the fourth quarter, beating the market forecasts of a 0.8% increase.
Following the hot inflation numbers, money markets implied a 73% probability of a rate hike, compared with 60% previously, according to Reuters.
Meanwhile, Australia’s big four banks, including the ANZ, Westpac, Commonwealth Bank of Australia and the National Australia Bank (NAB), altered their call, forecasting a quarter-point RBA rate hike in February.
Another economic indicator backing the expected rate lift-off was the Australian labor data. On January 22, the ABS said that the Unemployment Rate unexpectedly dropped to 4.1%, the lowest level since May, from 4.3%. Net employment jumped by 65.2K in December from -28.7K in November.
How will the Reserve Bank of Australia’s decision impact AUD/USD?
The AUD appears exposed to two-way risks against the US Dollar (USD) in the lead-up to the RBA showdown.
AUD/USD could snap the corrective trend and resume its uptrend if the RBA Governor Bullock’s comments and the updated economic forecasts suggest that more rate hikes remain on the table in the coming months.
Conversely, the Aussie pair could stretch its recent downtrend if RBA Governor Bullock plays down expectations of further rate hikes amid a potentially stable inflation projection.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, highlights key technical levels for trading AUD/USD following the policy announcement.
“AUD/USD is trading under the 0.7000 threshold ahead of the RBA rate call, holding its correction from a three-year peak of 0.7094 set on Thursday. The 14-day Relative Strength Index (RSI) has fallen sharply from the overbought region to currently test the 60 level, suggesting that the upward bias still remains intact.”
“The Aussie pair could reverse course and initiate a fresh uptrend toward the 0.7050 psychological level on a hawkish RBA rate hike. The next relevant resistance levels are aligned at the 2026 high of 0.7094 and the February 2023 high of 0.7158. Alternatively, the pair could challenge the 0.6900 area if the RBA disappoints the hawks. A firm break below that level will unleash additional downside toward the 0.6850 psychological barrier. The last line of defense for buyers is seen at the 0.6800 round figure,” Dhwani adds.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
