ING Predicts RBA Rate Hike, Cuts Year-End AUD/USD Target to 0.72

ING is predicting a 25 basis point rate hike to 4.6% from the Reserve Bank of Australia (RBA) today, citing a hot economy with strong labour demand and upside surprises in second-quarter GDP growth and inflation readings.

The bank's analysts say the RBA will stress that inflation risks remain tilted upwards due to the US-Iran conflict, which has raised global oil prices and pushed up domestic fuel costs. They note that Australia relies heavily on imported diesel, petrol, and jet fuel, and estimate a 10% rise in fuel prices could add over 0.3 percentage points to headline inflation.

ING also expects trimmed mean inflation to have held at 3.6% year-on-year in August for a third consecutive month, challenging the RBA's forecast of 3.3% by year-end. Labour demand remains strong, with unemployment at 4.6%, full-time employment growth strengthening in July and August, and participation reaching a record around 67%.

Despite a rough week for the Australian dollar (AUD/USD) due to weak risk sentiment and the global bond selloff, ING's short-term fair value model shows AUD/USD undervalued beyond a 1.5 standard deviation band. The bank has cut its year-end target to 0.72 from 0.73 and warns of a test below 0.70 in the near term, but expects an RBA hike to prevent a retest of June's roughly 0.69 lows.

Attention now turns to the RBA's statement and Governor Bullock's press conference for any signal on the path beyond today's rate decision. ING forecasts one hike each from the RBA and the Federal Reserve (Fed), with the Fed's coming in December, and notes that an October Fed hike could keep the US dollar in demand.