Australian Dollar Falls 0.3% After Australia Raises Rates to 4.85%
Key Facts
The Australian dollar fell in the November 3 session despite the Reserve Bank of Australia raising its cash rate by 25 basis points to 4.85%, in a move that matched market expectations. The currency dropped 0.3% to 0.6979 U.S. dollars, while moves in the dollar and yen reflected market caution ahead of the U.S. midterm elections. Reuters said the U.S. dollar was “on the defensive” as investors watched tensions between the United States and Iran. The dollar reached 157.92 yen, while the yen was broadly steady during a local holiday in Japan. The contrast between Australia’s rate increase and the currency’s decline brought attention to the inflation outlook and the possibility that the bank could pause rate hikes at its next meeting.
The bank raised its rate to the highest level since December 2008, according to a Reuters report, marking its fifth increase during 2026. But the decision did not win full board support: 3 of its nine members preferred to leave rates unchanged. The report said a Reuters poll found that 30 of 32 economists had expected the increase, while market pricing implied an 88% probability ahead of the decision. The increase alone was therefore not enough to support the currency, as the announcement coincided with a split over the need for further tightening. After the decision, Australian three-year government bond futures also fell 3 points to 95.14.
The bank said a further rate increase was needed to support inflation’s return to target, given continuing upside risks to its outlook. The latest data from the Australian Bureau of Statistics showed that the consumer price index rose 4.3% in the 12 months to September, up from 4.0% in the period to August. Trimmed mean inflation, a core measure, also rose to 3.6% from 3.5%. Reuters reported that core inflation at the time of the decision was 3.7%, above the bank’s 2% to 3% target range. The bank’s board said it “remains focused on returning inflation to target,” while taking into account the length of time inflation had remained elevated.
The bank raised its forecast for headline inflation to 4.5% in December 2026, compared with a previous estimate of 3.6%, before expecting it to fall to 2.7% in June 2027. The bank said higher global fuel prices and domestic price and cost pressures would delay inflation’s return to the midpoint of its 2% to 3% target range until mid-2028. This stated path presents a challenge for the bank, which must balance curbing price pressures against an expected slowdown in the labor market. The bank forecast the unemployment rate would rise to 5.1% by the end of 2028, about a quarter of a percentage point above its previous estimate. Before the November meeting, market pricing had indicated about one and a half further rate increases by the middle of the following year.
In energy markets, Brent crude futures rose 0.5% to $105.25 a barrel in early Asian trading, recovering some of the losses of more than 7% in the previous session. A Reuters report linked market caution to U.S.-Iran tensions and said U.S. strikes on Qeshm Island, which Washington described as “defensive,” had curbed earlier optimism about talks to end the eight-month war. The oil move matters in the context of the Australian bank’s forecasts, which noted that higher global fuel prices add to domestic price and cost pressures. The bank’s forecasts, meanwhile, did not point to an early return of inflation to the midpoint of its target range; instead, they put that return in mid-2028. The Australian dollar’s decline and moves in the dollar and yen thus remained part of a session marked by caution over the monetary policy outlook, energy risks and political tensions.