Investing.com– The Reserve Bank of Australia is widely expected to keep interest rates steady on Tuesday, although investors were on guard over the bank taking up a hawkish stance amid signs of sticky inflation.

The RBA is widely expected to keep its at 4.35%, leaving it unchanged for a fourth straight meeting since a hike in November. 

While the bank had tempered its hawkish outlook in recent months, analysts warned that a stronger-than-expected inflation reading for the first quarter could now put some hawkish language back on the table. 

RBA to wax hawkish, but rate hikes will take much more 

The RBA is now widely expected to at the very least reiterate that interest rates will stay high for longer, especially as inflation moved away from its 2% to 3% annual target rate in the first quarter. 

While inflation did retreat substantially from 30-year highs through 2023, sticky service costs and relatively strong consumption stalled this disinflationary trend in recent months. 

“While we don’t expect the Board to explicitly discuss a rate hike, the communication on Tuesday will be more hawkish than March,” ANZ analysts wrote in a note. 

“We continue to see the first rate cut  of a shallow easing cycle in November although, as we noted following the CPI , there is a risk this gets pushed into next year.” 

Analysts at Westpac said that while a scenario where the RBA threatens more rate hikes was not impossible, it appeared unlikely now, and would probably come later in the year if inflation remains sticky. 

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But Westpac analysts also said that such a scenario did not appear likely, and that they expected the RBA’s next move to be a cut, albeit much later in the year. 

In the near-term, Australian interest rates are expected to remain high, and the RBA is likely to signal as much on Tuesday.

How will the ASX 200 react?

Australian stock markets, specifically the benchmark index, are likely to fall in the face of any hawkish signals from the RBA, especially if the central bank brings back its threat of rate hikes.

But even the prospect of high for longer rates bodes poorly for local stocks, given that such a scenario heralds weaker domestic earnings and limits investment.

Bank stocks may see some strength on the prospect of high rates, although this trend is also expected to be offset by weakening credit activity.

How will AUDUSD react? 

The Australian dollar is likely to see some strength in the event of a hawkish RBA, with the pair set to rise. 

The AUDUSD pair rose 0.1% on Monday and was trading close to a two-month high. Anticipation of a hawkish tilt by the RBA, coupled with recent weakness in the U.S. dollar, saw the AUDUSD mark strong gains over the past three sessions. 

 

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