The Australian dollar stayed under pressure as consumer confidence slumped to levels last seen during past crises, even as the Reserve Bank of Australia (RBA) signalled it remains prepared to tighten policy further.
Confidence drops to crisis-era lows
The Westpac–Melbourne Institute consumer sentiment index fell 12.5% in March, dropping back to 81, a level last seen during the previous economic crisis. The decline accelerated in April, with the index sliding another 12.5% to 80.1, a historically low reading.
Survey respondents cited rising fuel costs and the risk of higher interest rates as key concerns, deepening pessimism about household finances and the broader economy.
OCBC strategists Sim and Wong said growing stagflation fears — slowing growth alongside persistent inflation — are forcing markets to reassess how much further monetary tightening is likely this year.
Weak sentiment, but spending still holding up
Despite the sharp deterioration in confidence, the downturn has not yet clearly fed through to actual spending, a key trigger for any potential shift in RBA policy.
Official data show Australian retail sales rising 4.8% year on year in February. More timely bank data indicate consumer spending in March rose 2.1%, though much of the increase was driven by higher fuel expenditure.
This disconnect between gloomy sentiment and still-resilient consumption is becoming more pronounced, leaving policymakers wary of easing their stance too soon.
RBA maintains firm tone despite “nightmare” backdrop
Deputy governor Andrew Hauser’s recent comments underscored the central bank’s focus on inflation, but did little to stabilise the currency, which remains weighed down by worries over both growth and price pressures.
Hauser described the combination of elevated inflation and softening activity as a “nightmare” scenario for the RBA. He stressed that inflation is still too high and that the bank does not yet have strong confidence that current interest rates are sufficient to return price growth to target.
Markets price in higher chance of May rate hike
Stubborn inflation expectations are testing the RBA’s resolve. The International Monetary Fund now projects Australia’s consumer price inflation will run at about 4% in 2026, placing the country above many other advanced economies.
Against that backdrop, financial markets are pricing around a 64% probability that the RBA will lift its cash rate to 4.35% at its May meeting, reinforcing the bank’s restrictive policy bias.
Commodities provide a partial offset for the currency
While domestic data and sentiment weigh on the Australian dollar, strong commodity prices are helping to provide a floor.
Copper has recently traded near two‑month highs around $6.09 per pound, and iron ore remains above $106 per metric ton. OCBC’s Sim and Wong noted that demand for materials linked to artificial intelligence infrastructure is supporting key export commodities, offering medium‑term backing for the currency.
As long as household spending does not show a sustained deterioration, they expect the RBA to keep its stance restrictive.
Asset valuations face fragile backdrop
The sharp divergence between deeply negative consumer sentiment and still‑solid, though partly inflation‑driven, spending data is creating a fragile environment for asset valuations and the currency.
Traders are now focused on the upcoming consumer price index release and monthly retail sales figures.
A marked drop in household expenditure could challenge the RBA’s hawkish position and temper expectations for further tightening. By contrast, another strong inflation reading would likely cement the case for additional rate hikes and keep pressure on the Australian dollar, even with ongoing support from commodity markets.
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