Australia's RBA Signals End of Tightening Cycle, Dovish Pivot Expected
The Reserve Bank of Australia held rates at 4.35% but dropped its hawkish bias, signaling that the next move is likely to be a cut in Q2 2026.
Priya Sharma
Emerging Markets Analyst
The Reserve Bank of Australia kept its cash rate unchanged at 4.35% on Tuesday but made a notable shift in its forward guidance, dropping the phrase "further tightening cannot be ruled out" for the first time since the hiking cycle began.
RBA Governor Michele Bullock said the board acknowledged "encouraging progress on inflation" but wanted to see Q1 2026 CPI data before committing to a rate cut. Australia's trimmed mean inflation fell to 3.2% in Q4, moving closer to the RBA's 2-3% target band.
Markets reacted sharply to the dovish pivot, with the Australian dollar falling 0.7% to $0.6320 against the USD and domestic bond yields declining across the curve. The 3-year government bond yield dropped 8bps to 3.62%.
Australian bank stocks rallied on expectations of lower interest rates, with the ASX 200 Financials sub-index gaining 1.4%. REITs were also strong, rising 1.8% as the prospect of rate cuts supports property valuations.
"The RBA is the last major central bank to acknowledge that the rate cycle has peaked," said Priya Sharma. "An April or May cut looks increasingly likely, which would follow the ECB, BOC, and Riksbank in easing."