The Aussie Dollar (AUD) pulled back from three-year highs at 0.7147 as the US Dollar (USD) picked up following upbeat US Nonfarm Payrolls data. The pair, however, remains steady above 0.7100 as hot inflation expectations in Australia keep pressure on the Reserve Bank of Australia (RBA) to tighten its monetary policy further.
Data released from the Melbourne Institute revealed that Australian Consumer Inflation Expectations rose to 5% in February, from 4.6% in January, reaching their highest rate in almost three years.
The RBA hiked interest rates last week, for the first time in more than two years, and hinted at further monetary tightening ahead to bring inflation to the bank’s 2% target. This triggered a monetary policy divergence with the US Federal Reserve, which led to a 6.6% AUD/USD rally in the last four weeks, from the moment the RBA’s hawkish shift became clear.
The RBA keeps the door open for further rate hikes
RBA Governor Michelle Bullock reiterated this view earlier on Thursday, affirming that the door remains open for further rate hikes, although she highlighted the bank’s preference to wait for the data and respond accordingly.
In the US, the upbeat Nonfarm Payrolls report released on Wednesday provided some support to a hitherto weak US Dollar, but the market reaction has been moderate so far.
Net employment rose by 130K in the US in January, almost twice the 70K growth expected by the market, but an excessive concentration of the employment creation in the healthcare sector and a sharp downward revision of 2025 figures have tempered investors’ optimism. Markets are likely to wait for Friday’s US Consumer Price Index (CPI) report for a better picture of the Fed’s monetary policy outlook.
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.
