RBA Warns of Inflation Risks as Australian Dollar Edges Higher

The Reserve Bank of Australia's (RBA) August meeting minutes revealed a hawkish tone, supporting the Australian dollar in its current trading range. The RBA decided to keep the cash rate unchanged at 4.35%, but warned that inflation risks are skewed to the upside and signaled readiness to raise rates again if necessary.

The committee considered several risks that could push inflation above forecasts, including the ongoing Middle East conflict driving up oil prices, cost pressures being more fully passed through to consumer prices, and investment in AI and data centers exceeding expectations. However, they concluded that holding rates steady was appropriate, citing sufficient time before the next meeting to assess whether upside risks are materializing.

Core inflation rose to 3.6% in the second quarter, while the unemployment rate is projected to gradually rise to 4.8% by the end of 2028. The trade-weighted Australian dollar has depreciated by approximately 1% since May due to narrowing interest rate differentials and lower commodity prices.