Will the Australian dollar continue to fall? The central bank's hawkish rate hike provides the answer

In the latest monetary policy decision, the Reserve Bank of Australia (RBA) took the action widely expected by the market, and this decision had an immediate impact on the Australian dollar exchange rate. Regarding whether the AUD will continue to fall, the strong signals from the central bank suggest the answer may be surprising to many investors.

RBA Raises Rates as Expected, AUD Rebounds Significantly

On February 3rd, the RBA announced a 25 basis point increase in the benchmark interest rate to 3.85%, a move fully in line with market expectations. In the subsequent policy statement, the committee emphasized that private sector demand has grown noticeably faster than expected, the labor market remains tight, and inflation pressures are expected to stay above target in the short term.

RBA Governor Philip Lowe explicitly stated that current inflation pressures are too strong and that risks of inflation getting out of control must be prevented. Although the central bank has not provided specific guidance on the future interest rate path, the committee will continue to closely monitor economic data. Notably, the RBA pointed out that a stronger AUD would help reduce import costs and ease inflationary pressures.

Following the announcement, the AUD/USD rose nearly 1%, successfully breaking above the 0.7 level. At the same time, AUD/JPY reached a new high since July 2024, climbing to 109.35. More importantly, since early 2025, the AUD/USD has gained over 5%, indicating that this strength is not just a short-term rebound.

Persistent Inflation, Central Bank’s Hawkish Stance Clear

The main reason for the rate hike is that inflation has not yet been effectively controlled. While the rate increase was not unexpected, the policy signals in the statement are clearly hawkish. This indicates that the central bank views the economic situation and price pressures as more severe than market expectations, and is more determined to use policy tools to maintain price stability.

As a high-yield currency, the AUD benefits from the central bank’s hawkish stance, which supports this asset class strongly. Investors find holding AUD assets more attractive under high interest rates, driving continued buying of the currency.

Market Anticipates Further Rate Hikes, AUD’s Uptrend Likely to Continue

Looking ahead, the currency market pricing suggests the RBA may raise rates again in 2026, potentially pushing the rate to around 4.1%. Economists at Capital Economics, including Abhijit Surya, assume that the RBA will likely hike another 25 basis points, with the most probable timing being May. However, he also notes that since the RBA expects core inflation to remain above the 2-3% target range even by early 2028, further tightening may be necessary then.

This expectation is actually positive for the AUD exchange rate. If the market believes the RBA will maintain relatively high interest rates, the interest rate differential will remain attractive, providing sustained upward momentum for the AUD.

Institutions Generally Optimistic About AUD Outlook, Upside Still Large

Richard Franulovich, head of FX strategy at Westpac Banking Corporation, believes that driven by the rate hikes, the AUD could further appreciate against other major currencies. He specifically points out that the market has not fully priced in this rate hike decision, and the hawkish signals in the statement reinforce this view. As expectations for future rate increases are incorporated into pricing, the AUD has gained ample upward momentum.

From a technical and fundamental perspective, the AUD’s upward trend is already established, with no immediate catalysts for reversal. As long as the global economic situation remains stable, the RBA’s policy stance of maintaining or further increasing rates is unlikely to change.

Will the AUD Still Fall? The Answer Is Clear

Considering the central bank’s policy stance, market pricing expectations, and institutional views, it is unlikely that the AUD will experience significant depreciation over a considerable period. On the contrary, supported by the central bank’s hawkish policies, the AUD’s appreciation trend is expected to continue into 2026. For investors holding a bearish view on the AUD, it is time to reassess their outlook.