Australia CPI cools to 3.8%, sealing case for extended RBA hold

Australia's softer-than-expected inflation print has aligned all four major banks behind an extended Reserve Bank pause, sending the Australian dollar below its technical channel.

Australia's consumer price index rose 3.8% in July, undershooting expectations and cementing a consensus among the nation's four largest banks that the Reserve Bank's tightening cycle has concluded for now.

"The data removes any remaining pressure for a near-term hike and pushes the timeline for a potential cut further into 2027," said David Scutt, senior market strategist at Convera.

The print came in below the 4.1% consensus estimate, according to Bloomberg-compiled forecasts, and marked a deceleration from the prior month's 4.2% reading. Commonwealth Bank, Westpac, National Australia Bank and ANZ all now project the RBA will hold the cash rate at 4.35% through year-end. The Australian dollar fell 0.6% to $0.6782, breaking below its two-month rising channel, with traders targeting the 0.6750 support level.

The softer inflation reading reduces the risk of a rate hike that would have further pressured an already slowing domestic economy. Markets now price less than a 10% probability of an RBA increase at the next meeting in September, down from 25% before the release. The extended hold scenario leaves the Australian dollar exposed to further weakness if the US Federal Reserve maintains its hawkish stance — the Fed's own rate decision is due Wednesday, with the CME FedWatch tool showing a 70% probability of steady rates.

The July CPI outcome extends a trend of moderating price pressures that began in late 2025, when inflation peaked at 5.1%. The last time Australia's annual inflation rate was below 4% was in November 2025, when it printed at 3.9% before reaccelerating. The current trajectory suggests the RBA's 2% to 3% target band remains achievable by mid-2027, though the central bank has emphasized it will not tolerate a prolonged period above that range.

For the Australian dollar, the breakdown below the rising channel that had held since May represents a technical shift. The 0.6750 level is a cluster of support — the 200-day moving average converges near that point, and it marked the June low before the AUD's two-month rally. A break below that threshold would open the path toward 0.6650, the March trough, according to technical analysis from Commonwealth Bank.

The divergence between RBA and Fed policy paths is the key variable for AUD/USD. While Australian markets now see rates on hold, US markets are pricing a 70% probability that the Federal Reserve will keep its benchmark rate at 5.25% to 5.50% at Wednesday's meeting, with some analysts flagging the risk of a hawkish dissent. "The RBA is done, but the Fed may not be — that rate differential is a headwind for the Aussie," said Joseph Capurso, head of international economics at Commonwealth Bank of Australia.

The extended RBA pause also has implications for Australian bond markets. The three-year government bond yield fell 8 basis points to 3.92% after the CPI release, reflecting reduced expectations for a hike. The yield curve remains inverted, with 10-year bonds yielding 4.28%, signaling that investors expect economic growth to slow further.

This article is for informational purposes only and does not constitute investment advice.