RBA Meeting Expected To Deliver May Rate Rise

The Australian dollar has moved to 71.89 US cents today, its strongest level since 2022, as markets sharply increased their expectations for another Reserve Bank of Australia interest rate rise at the May board meeting following employment data that showed the labour market remains too tight for policymakers to contemplate easing.

The AUD climbed to 0.7189 against the US dollar in afternoon trading, marking a fresh four-year peak and extending gains of 7.35% since the start of the year. The currency is now testing critical resistance at the 0.7185-0.7186 level, a threshold that technical analysts view as the gateway to a sustained break toward 0.72-0.73. Australian front-end bond yields rose in tandem, with the three-year government bond yield climbing 8 basis points to 3.87%, while rate-sensitive sectors including banks and property trusts underperformed the broader ASX 200 index.

Swaps markets have repriced aggressively following today’s labour data, now pricing a 67% probability of an additional rate hike at the May 4-5 RBA board meeting, up from 62% a week ago.

The Employment Data

The Australian Bureau of Statistics reported the unemployment rate held steady at 4.3% in March, defying some economist expectations for a modest uptick. The stability came despite an 18,000 increase in total employment and a 4,000 decline in the number of unemployed persons, while the participation rate eased 0.1 percentage points to 66.8%.

Critically for monetary policy, the composition of employment growth tilted heavily toward full-time positions, which rose by 53,000 workers during the month. This gain was partially offset by a 35,000 decline in part-time employment. Sean Crick, ABS head of labour statistics, noted that full-time employment increased by 29,000 for men and 24,000 for women, while part-time employment fell by 19,000 for men and 16,000 for women.

The strength in full-time hiring is particularly significant because it typically signals underlying economic resilience and sustained wage pressure, both factors that complicate the RBA’s inflation-fighting mandate. The central bank has repeatedly emphasised that it needs to see a clear loosening in labour market conditions before considering any pivot toward monetary easing.

Policy Divergence Driving Currency Strength

The Australian dollar’s ascent reflects a fundamental shift in relative monetary policy trajectories between Australia and the United States. Higher interest rates tend to support the AUD against the USD because they increase returns on Australian assets relative to US assets, attracting capital inflows from yield-seeking international investors.

This rate differential story has become increasingly compelling as the Federal Reserve edges closer to eventual rate cuts while the RBA maintains a tightening bias. The divergence is particularly stark given that just twelve months ago, markets were pricing aggressive RBA easing through 2026. That narrative has been comprehensively overturned by persistent inflation readings and labour market tightness.

The RBA’s March 17 decision to lift the cash rate by 25 basis points to 4.10% surprised some who had expected the board to remain on hold. Minutes from that meeting revealed staff analysis suggesting that if oil prices remain near US$100 per barrel, headline consumer price inflation could temporarily lift to around 5%, far above the central bank’s 2-3% target band.

Inflation Concerns Remain Central

Sticky core inflation remains the primary driver of hawkish RBA expectations heading into May. The trimmed mean measure, which strips out volatile price movements, has remained stubbornly elevated in the mid-3% range, while energy and petrol prices linked to Middle East geopolitical tensions threaten to push headline CPI toward 4-5% in coming months.

RBA communications have stressed that inflation risks are skewed to the upside, making the board reluctant to entertain rate cuts despite some moderation in economic growth. The central bank’s framework explicitly aims to return inflation to target while avoiding a sharp rise in unemployment, a delicate balancing act that currently tolerates joblessness around 4.3% without rushing to ease policy.

Market analysts note that today’s employment data validates this patient approach. The labour market is demonstrating sufficient resilience to absorb higher borrowing costs without an immediate spike in joblessness, providing the RBA with political and economic cover to maintain restrictive settings or even tighten further if inflation fails to moderate.

What This Means

The prospect of additional monetary tightening carries significant implications for Australia’s growth through the remainder of 2026.

Economic forecasts already anticipate GDP expansion slowing to below 2%, and a May rate hike would increase the risk of a sharper deceleration that pushes unemployment toward or above the RBA’s own projections of mid-4% levels.

Housing markets, which have shown surprising resilience despite elevated borrowing costs, face renewed pressure from any further rate increases.

Consumer discretionary spending, already constrained by cost-of-living pressures, would likely soften further as mortgage repayments consume a larger share of household budgets. These dynamics create a potential feedback loop where tighter policy to combat inflation ultimately generates the economic weakness that brings inflation down, but at the cost of higher unemployment.

With unemployment holding at 4.3% despite strong full-time job creation, the labour market appears resilient enough to withstand further policy tightening, yet the risks of overshooting into economic weakness are rising as borrowing costs climb.

Markets will scrutinise every data release between now and early May, with those hoping that the tightening cycle has reached its peak needing to see some meaningful change. For the time being at least, markets are expecting another rate rise, bringing the cash rate from 4.1% to 4.35% in order to tackle persistent inflation, although the board has been split in recent meetings, indicating that the right data could still see a shift back to a more neutral tone.

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