J.P. Morgan Private Bank’s Yuxuan Tang and John Li have provided the following assessment of yesterday’s RBA interest rate hike.
Yuxuan Tang, Asia Head of Rates & FX Strategy at J.P. Morgan Private Bank:
The RBA delivered a 25bp rate hike, taking the cash rate to 4.35%, now on par with the 2024–25 peak. As an early mover globally, this marks the third rate hike by RBA in 2026, consistent with our view that the RBA would front‑load tightening to address sticky inflation amid resilient domestic demand.
Governor Bullock’s tone in the press conference turned meaningfully more neutral. Notably, she remarked: “One reason to increase interest rates was to give ourselves space now to sit and see what happens.” She also repeatedly highlighted heightened uncertainty on the economic outlook due to higher energy prices. To us, this signals a likely pause from here, representing a clear shift away from the hawkish rhetoric seen in prior meetings.
We remain constructive on the AUD, as carry dynamics likely dominate FX market from here. Our mid‑2027 AUDUSD target is set at 0.72 (0.70–0.74). Since turning bullish on AUD in Q2 2025, the currency has appreciated ~10.4% against the USD.
Also read: Australian Economic View – May 2026
John Li, Head of Asia Fixed Income Credit Strategy, J.P. Morgan Private Bank:
Today’s meeting marks a compelling entry point for Australian rates and fixed income. Markets are still pricing in more than one additional hike this year, which screens full according to today’s policy messaging. 2yr AGB yield at ~4.67% now is a 15‑year high.
We recommended AUD bonds back in December 2025 for three reasons: 1) fiscally responsible government, 2) stable market, and 3) attractive yield. AUD bonds performed well on an unhedged basis, with a total return exceeding 7% YTD thanks to carry and FX. We see AUD bonds as an option for equity-like returns within a fixed income allocation. We continue to see value at current levels and recommend buying AUD bonds on an unhedged basis.
Investors can consider Floating Rate Notes (near-zero duration; coupons increase when the central bank hikes rates) and fixed-rate Investment Grade bonds, with a focus on the 5Y point.
