Synopsis:

BofA expects the Reserve Bank of Australia (RBA) to hold rates at 3.85% at next week’s July policy meeting, defying market consensus for a 25bp cut. They see persistent inflation pressures, robust demand, and improving global growth outlook as reasons for a wait-and-see approach, which underpins their bullish AUD/USD stance.

Key Points:

• Inflation Still Sticky:
  • Underlying inflation remains at the top of the RBA’s 2-3% band, with projections showing it won’t reach the midpoint before mid-2027.
  • This stickiness, combined with supply-side constraints, argues against further near-term easing.

• Domestic Economy Still Running Hot:
  • BofA sees a positive output gap and demand accelerating faster than supply, while the labour market stays tighter than the RBA’s estimate of full employment.

• Global Headwinds Easing:
  • Tariff de-escalation has been broader and faster than expected, improving the global growth backdrop, although risks remain.
  • The RBA is likely to assess the impact of these developments before adding more stimulus.

• Already Front-Loaded Easing:
  • With 50bps of cuts already delivered, BofA expects the Board to pause and gather more data on how prior cuts are flowing through the economy.

• AUD/USD Outlook:
  • This surprise hold would support a bullish view on AUD/USD, with resilient domestic fundamentals and easing global headwinds providing additional backing.

Conclusion:

BofA expects the RBA to surprise markets by holding rates steady at 3.85% in July, defying market pricing for another cut. Persistent inflation, strong demand, and receding global uncertainties argue for caution, with the pause reinforcing BofA’s bullish stance on AUD/USD in the near term.