RBA Expected to Hold Rates Steady Amid Hawkish Tone

The Reserve Bank of Australia's (RBA) upcoming interest rate decision is expected to be a hawkish hold, with most money markets and economists predicting that the cash rate will remain steady at 4.35 per cent.

Despite better-than-expected inflation data in June, which saw the quarterly trimmed mean drop to 3.6 per cent, above the RBA's two to three per cent target range, Reserve Bank governor Michele Bullock is likely to keep the door open to future rate hikes.

Morgan Stanley's Australian chief economist Chris Read expects a hawkish tone from the board statement and Bullock's press conference, citing the persistence of above-target inflation and the risk it poses to inflation expectations.

However, the softer domestic demand outlook should temper this message somewhat. The RBA has raised the official cash rate three times so far this year.

The re-escalation in the Middle East conflict also risks reigniting inflation after it eased in June, according to Commonwealth Bank head of Australian economics Belinda Allen.

The earliest opportunity for another hike will be November, but along with economists at all four big banks, Morgan Stanley analysts expect the RBA's next move will be down rather than up.