The Reserve Bank of Australia (RBA) may hold off on cutting interest rates in August.

Indeed, Bank of America (BofA) analysts have flagged a possible 'hawkish' shift in RBA policy.

Noting stronger domestic economic data, they suggest the central bank might skip the expected rate cut, potentially surprising financial markets that are anticipating the move.

Bank of America’s custom RBA sentiment tracker shifted to hawkish territory after the RBA’s July meeting, where rates were held steady at 3.85%, Pound Sterling Live reports.

The July decision surprised markets by pausing rate changes, sparking a rally in the Aussie Dollar. The RBA signalled it is still in a rate-cutting cycle, leading most to believe the pause was a chance to assess data before cutting rates in August.

However, Bank of America’s indicator, which serves as an early signal for Australian short-term rates, suggests that the RBA’s August Monetary Policy Statement may need to acknowledge a higher inflation trajectory.

This raises the risk that the RBA will increase its medium-term inflation forecasts, limiting its ability to cut interest rates significantly.

“Rising housing market momentum, above-average credit growth, rising job vacancies and declining underemployment are all consistent with our view that policy is only marginally restrictive,” Bank of America stated.

Furthermore, BofA estimates Australia’s neutral nominal rate at around 3.5%, close to current levels, suggesting there’s room for only one more 25 basis point cut before policy turns stimulatory.

As such, with the risk of a hawkish shift in RBA guidance, BofA sees potential upside in betting on the Australian Dollar.

Currencies often strengthen when their central banks move from an accommodative stance, cutting rates and signalling more cuts, to a restrictive one, where rates are held steady or raised.

Attention now focuses on Australia’s quarterly inflation data due midweek. A higher-than-expected reading could confirm the interest rate adjustment that Bank of America anticipates.

“With the market still heavily priced for rate cuts, the risks for the AUD are skewed more towards a higher CPI print this week,” according to David Forrester, Senior FX Strategist at Crédit Agricole.