The Reserve Bank of Australia (RBA) has increased the Official Cash Rate (OCR) by 25 basis points to 3.85%, following the February monetary policy meeting. This decision aligns with market expectations and signifies a response to strong inflation, which is predicted to remain above the target for some time.
RBA Governor Michele Bullock emphasised the necessity of this action to prevent inflation from becoming unmanageable. The RBA board will continue actively monitoring economic data, acknowledging uncertainties regarding the domestic economy and inflation levels. Inflation picked up notably in the latter half of 2025, driven by greater capacity pressures and a faster-than-expected demand growth.
Impact On The Australian Dollar
In response, the Australian Dollar surged, increasing by 0.75% against the US Dollar, and traded above 0.7000. This boost hints at the currency’s sensitivity to interest rate adjustments and inflation forecasts. The RBA aims to restore equilibrium between demand and supply, targeting a 3.9% cash rate by June and 4.2% by December, with revised inflation projections extending to 2027.
The RBA plans to curb rising inflation, despite following a global trend of easing rates in recent years. Economic indicators, such as a drop in the unemployment rate to 4.1% and increased private demand, have supported expectations of rate hikes.
The Reserve Bank of Australia’s decision today signals that inflation remains the top concern, confirming the pulse we saw was too strong. The pickup in inflation during the second half of 2025 was more significant than initially thought. This hawkish shift means we need to reposition for a higher interest rate environment in Australia for the coming weeks.
The immediate strength in the Australian dollar, pushing AUD/USD above 0.7000, looks set to continue. We believe buying call options on the AUD/USD with strike prices around 0.7100 and 0.7150 could be an effective way to play this expected upside. This strategy offers a defined risk while capturing potential gains from the RBA’s firm stance.
Market Reactions And Predictions
The RBA’s own forecasts now project the cash rate hitting 4.2% by December, which is a material upward revision. This implies that the prices of Australian 3-year government bond futures are likely to fall further as the market prices in more hikes. Shorting these futures contracts is a direct way to position for this expected tightening cycle.
This hawkish view is supported by recent data showing the quarterly trimmed mean CPI at 0.9% in the fourth quarter of 2025, which was higher than expected. This is compounded by a surprisingly tight labor market, with the unemployment rate falling to 4.1% in December. Fundamentally, with iron ore prices recently trading above $130 per tonne, the currency has a strong external tailwind.
Despite the hawkish tone, the Governor’s comments about being “cautious” and “data-dependent” mean we should expect significant volatility around key data releases. Traders could consider buying options straddles on the AUD/USD ahead of the next monthly CPI report to profit from a large price move in either direction. This helps hedge against the RBA suddenly pausing if new data softens unexpectedly.
As the RBA breaks from a potential global easing trend, the Aussie dollar should outperform currencies with more dovish central banks. We are looking at pairs like AUD/CAD or AUD/EUR for potential long positions. The widening yield spread between Australian and other government bonds, like the over 50 basis point premium on Australian 10-year bonds compared to U.S. Treasuries we saw in late 2025, makes these carry trades increasingly attractive.
