Preview: RBA Rate Decision 5 May 2026
Read Time: 4-5 minutes
Markets are expecting the RBA to hike rates this week, taking the cash rate from 4.1% to 4.35%.
This will mark the third hike from the bank since the start of the year, as they attempt to curb rising cost pressures in the economy.
Current pricing puts the odds of a hike this week by around 80%, with expectations for another two hikes (assuming we get one this week).
As the odds of a hike are high, the hike itself arguably won’t be as important to the market as the statement, the vote split, and the press conference.
The recent economic data arguably validates market pricing for another hike.
Inflation remains above target, unemployment remains very low, and domestic demand held up better than expected.
The possibility that higher energy costs will eventually feed into core inflation is another risk the bank will be cautious about.
However, there are reasons to be cautious of current market pricing as well. Last week’s inflation data was softer than expected, with trimmed mean CPI sitting just above the target band at 3.2%.
The other risk is at what level the restrictive policy will start to negatively impact employment and domestic demand.
The question for markets this week will be simple…
Is this a hawkish hike that justifies the current pricing for two more hikes, or is it a cautious hike that suggests a less aggressive rate path?
In the statement, markets will focus on whether the bank believes inflation risks remain further tilted to the upside.
There will also be attention on the vote split. With a tight 5-4 vote split in March, another divided outcome could see markets start to doubt current expectations for two more hikes.
Similarly, for the press conference, the market will be looking for a more direct message from Governor Bullock about whether this was a hawkish hike or a more cautious one.
It’s worth noting that recent RBA statements have not accurately reflected the ‘mood’ portrayed during press conferences.
We have seen quite a few occasions where the initial reactions to the statement were sharply reversed during the press conference, so be mindful of that.
It’s worth noting that recent data show institutional positioning remains very long the AUD and, arguably, a bit stretched when measured as a percentage of open interest.
This means that a decent amount of good news may already be adequately reflected in the price.
When we combine that with current rate expectations, the argument can be made that the bar for a hawkish surprise is high heading into the meeting.
This doesn’t mean the AUD can’t rally, but it does mean it would take a clear more hawkish message.
Scenario 1: Hawkish hike
For a hawkish hike, markets would need to see a 25bp hike, a stronger vote split (8-1), and language suggesting inflation risks remain high and further hikes are needed.
The catch is that this is a higher bar, and with a lot of tightening priced, Governor Bullock will have to sound very hawkish to generate a sustained move higher for the AUD.
Possibly talking of a series of hikes, or the need for much more restrictive policy than previously anticipated.
Scenario 2: Cautious hike
A cautious hike is arguably the most plausible risk for AUD bulls.
In this scenario, we see the expected 25bp hike, but the vote split remains tight at 5-4, and the statement puts more weight on the recent CPI undershoot.
The risk of initial bearish reactions to the statement is that Bullock’s tone will be important. A cautious hike would require her to curb expectations for two more hikes.
Alternatively, she could talk up the uncertainty of the rate path by stressing yet another tight vote split.
As a lot of good news is priced, markets arguably won’t need a dovish take to see potential AUD weakness, simply just uncertainty over rate pricing for another two hikes.
Scenario 3: Surprise hold
This is the least likely outcome this week. Given the economic backdrop and the bank's previous communication, a hike seems like the most plausible outcome.
However, this is the RBA we are talking about, and they have surprised markets many times before.
Even though a hold is not the most probable outcome, with the RBA, it’s never impossible.
Rather be safe than sorry, they always say.
In the unlikely event of a hold, the AUD would likely see strong immediate downside, as the curve will need to reprice, and AUD bulls likely take some profit off the table.
The guidance following a surprise hold will matter immensely, as a hold with planned hikes later could be faded later.
The AUD momentum remains bullish with price currently trading above the 20, 50, 100 and 200DMAs.
On a potential hawkish surprise, last week’s swing high around 0.7228 will be a first test, followed by resistance at the swing high from June 2022 at the 0.7283 mark.
Above that, we also have the weekly implied volatility resistance sitting at the 0.7300 psychological price level.
In the event of a dovish reaction, we have strong recent support around 0.7115, which held multiple tests in the past few weeks.
That also converges with the weekly implied volatility support level just above, at 0.7120.
If support fails, traders will be eyeing the 50DMA, currently around 0.7061.
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