Bullock sets 3.8% CPI threshold for RBA August rate hike

RBA Governor Michele Bullock has effectively set a 3.8% trimmed mean threshold for an August rate hike, raising the bar for policy action even as the central bank retains its tightening bias.

RBA Governor Michele Bullock has reframed Wednesday's Q2 CPI report as a test of whether core inflation exceeds 3.8%, raising the bar for an August rate hike even as the central bank retains its tightening bias. The distinction shifts the question from whether inflation remains elevated to whether it is hot enough to justify immediate action.

"The Board is prepared to act as required to achieve its mandate, including by increasing the cash rate further if needed," Bullock said in a speech Monday, while acknowledging that both housing activity and the labor market have softened more than the RBA anticipated. Those developments point to monetary policy exerting greater restraint on demand than the central bank itself expected only months ago.

Consensus expects the quarterly trimmed mean — the RBA's preferred gauge — to rise 0.9% quarter-on-quarter, lifting the annual pace to 3.7% from 3.6%. That would mark a fourth consecutive quarterly reading within the 0.8% to 1.0% range, confirming sticky underlying inflation while remaining just below the RBA's own May forecast of 3.8%. Headline CPI is expected at 0.7% quarter-on-quarter, down from 1.4% in Q1, with the annual rate holding at 4.1%.

A print at or above 3.8% would suggest inflation is running hotter than the RBA anticipated, restoring urgency for a hike at the Aug. 11 board meeting. A reading around 3.7% or lower would reinforce Bullock's view that inflation is evolving as expected, giving policymakers little incentive to tighten immediately. Interest-rate markets currently price a 28% probability of a hike in August and 94% by December, which would bring the cash rate to 4.60%.

Three Forces Capping AUD/USD

AUD/USD has stalled near 0.7000 after rebounding from a June low of 0.6864, with three distinct headwinds limiting further upside. The pair traded at 0.6998 Tuesday afternoon, unable to break above the 55-day exponential moving average at 0.7008 and the 38.2% Fibonacci retracement of the 0.7277-to-0.6864 decline at 0.7022.

First, Bullock's tempered urgency has reduced the premium for holding Australian dollars ahead of the CPI print. Second, lingering hawkishness from the Federal Reserve — a residual effect of July's oil spike toward $100 — continues to support the greenback even after Brent crude retreated to $83 to $88 a barrel on the US-Iran pause. Third, deteriorating risk appetite from Asian technology selloffs has weighed on the Aussie, with the KOSPI losing 10.84% and the Nikkei falling 3.95% Monday as markets reacted to concerns over Nvidia's financing model.

What Happens Next

The Fed's rate decision lands Wednesday alongside the Australian CPI, creating a dual risk event for AUD/USD. The Federal Open Market Committee is expected to hold the fed funds rate at 3.50% to 3.75%, but a hawkish statement could overturn any CPI-driven Aussie gains regardless of the inflation print.

A stronger-than-expected CPI might give AUD/USD a brief bounce above 0.7020, but that momentum is unlikely to sustain unless the Fed delivers a dovish surprise. On the other hand, a weaker-than-expected print — or even an in-line result — could bring sellers in and push the pair decisively through the 0.6964 minor support and the near-term rising channel floor. A break below that level would argue the rebound from 0.6864 has completed as a corrective bounce, opening a retest of that low and a resumption of the broader downtrend from 0.7277.

The last time the RBA signaled a similar shift in its reaction function was in late 2024, when Governor Bullock's language preceded a two-meeting pause that allowed the cash rate to hold steady while inflation gradually moderated. Markets will watch Wednesday's CPI print for whether history repeats or the bar for action gets cleared.

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