Overview
UBS has updated its outlook for Reserve Bank of Australia policy, now forecasting a 25 basis-point increase at the RBA meeting on May 5, followed by an additional rise in August that would lift the terminal cash rate to 4.6%. The bank's revised view comes amid mixed inflation signals in Australia.
Inflation signals and central bank stance
UBS cited trimmed mean consumer price index readings that showed a small downside surprise, while year-over-year inflation figures nonetheless indicate persistent upward pressure on prices. In UBS's assessment, underlying inflation remains firm. The bank noted that the RBA continues to carry a tightening bias and that the latest data reinforce that stance.
Currency outlook
On the currency front, UBS retained a cautious near-term view on the Australian dollar, attributing that stance to the ongoing strength of the U.S. dollar. The bank set an end-June target for the AUD/USD exchange rate at 0.70. Looking further out, UBS is more constructive over a 12-month horizon and projects AUD/USD at 0.75, while expressing a preference for selective currency crosses rather than a blanket bullish stance.
Implications for markets
UBS's forecast implies an expectation of additional RBA tightening in the coming months based on the persistence of underlying inflation, even as some trimmed-mean measures come in slightly softer. The bank's near-term caution on the Australian dollar reflects external currency pressures, notably U.S. dollar strength, while its 12-month target signals a more optimistic view further out.
Bottom line
UBS has raised its view of where RBA policy is headed, bringing the expected terminal rate to 4.6% after a May hike and another move in August. The bank interprets recent CPI data as mixed but ultimately supportive of further tightening, and it balances a cautious short-term currency stance with a more constructive outlook over the next year.