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The Reserve Bank of Australia (RBA) Governor noted that inflation has risen more than expected, and if it remains persistent, it could affect policy. The output gap is possibly closed, and the labour market remains tight, though some inflation increases are temporary.
The Australian Dollar (AUD) might strengthen with higher interest rates. At the time of writing, the AUD/USD was trading 0.13% higher at 0.6574. The RBA ensures stability with an inflation target of 2-3% and influences the AUD through interest rates and measures like quantitative easing or tightening.
Quantitative Easing And Tightening
Quantitative easing involves the RBA printing AUD to buy assets, resulting in a weaker currency. In contrast, quantitative tightening halts asset purchases, potentially boosting the AUD value. Economic data such as GDP and employment influence AUD by indicating economic stability and growth, encouraging capital inflows.
Inflation data also affects AUD by potentially leading the RBA to alter interest rates, attracting international capital. If inflation expectations remain well-anchored, the RBA’s strategy involves maintaining currency stability while supporting economic prosperity. Decisions are made during regular and emergency meetings by the RBA’s board of governors.
The Reserve Bank of Australia is signaling that its patience with inflation is wearing thin. Governor Bullock’s comments suggest that if inflation proves more persistent, policy changes are on the table. This is a clear warning that another interest rate hike is a real possibility.
Recent Inflation And Labor Market Data
We need to look closely at the recent data that is driving this view. The latest monthly CPI indicator for October 2025 came in hot at 3.8%, surprising many who expected a figure closer to 3.5%. This upside surprise is exactly what the RBA is focused on when it says it is looking very hard at the numbers.
A tight labor market, with the unemployment rate holding at a low 3.7% in October 2025, is adding to these inflationary pressures. We saw a similar situation back in 2023, where persistent inflation and a strong job market forced the RBA’s hand after a pause. History suggests we should not underestimate their resolve to act.
For derivative traders, this increases the appeal of strategies that benefit from a stronger Australian dollar and higher interest rates. The market is now pricing in an over 70% chance of a 25 basis point rate hike by the February 2026 meeting, suggesting that call options on the AUD and paying fixed on interest rate swaps are becoming more attractive.
