Australian dollar gets little lift from central bank rate hike as Iran war concerns dominate

[SYDNEY] The Australian dollar flatlined on Tuesday after the country’s central bank raised interest rates for a third straight time, while leaving open the question of whether further tightening was needed.

Wrapping up its May meeting, the Reserve Bank of Australia’s policy board lifted the cash rate by 25 basis points to 4.35 per cent, matching a peak hit during the inflationary fallout from the Covid-19 pandemic. The board voted 8 to 1 for the hike, a hawkish shift from March when it split 5-4.

Yet the board also noted that having raised the cash rate three times, “monetary policy is well placed to respond to developments,” hinting it might be done for now.

The Aussie was a shade softer at US$0.7163, having slipped 0.5 per cent overnight as a fresh jump in oil hit risk assets. Strong support lies around US$0.7102, with resistance at US$0.7228.

Markets imply around a 20 per cent chance of an additional move in June, but are fully priced for 4.6 per cent by September, which would be the highest since late 2011.

A jump in oil prices caused by the US-Israeli war on Iran saw the RBA sharply raise its forecasts for inflation this year, seeing it peak near 5 per cent, while cutting the outlook for economic growth and employment.

Concerns have only grown after Iran hit a United Arab Emirates port and several ships in the Strait of Hormuz after the US Navy launched an attempt to help some vessels exit the waterway.

“If we see the strait begin to reopen through this month, we expect the board to hold rates steady,” said Harry Murphy Cruise, head of economic research for Oxford Economics Australia.

“But the longer the strait remains closed, the fewer options the board will have; a prolonged closure would force the RBA’s hand to hike rates multiple times this year to tame inflation and inflation expectations.”

SEE ALSO

Australia’s central bank ramps up inflation fight with third rate hike this year

Australia’s Regis to take over Vault, creating A$10.7 billion gold producer

The New Zealand dollar was off 0.1 per cent at US$0.5859 after easing 0.4 per cent overnight. It has support at US$0.5816, while resistance stands at US$0.5926. REUTERS