Interest rate decisions grab the headlines, but the Reserve Bank has pointed to a stronger Australian dollar as a less visible ally in bringing inflation down.

Most discussion of the Reserve Bank's inflation fight focuses on the cash rate and what it means for mortgages. But there is another lever at work in the background, one the RBA does not set directly: the value of the Australian dollar.

Speaking in his remarks in Sydney on 13 August, Assistant Governor (Financial Markets) Christopher Kent pointed to "the Australian dollar appreciating by around 5 per cent on a trade-weighted basis since the start of the year."

He explained why that matters: "A higher exchange rate helps moderate inflation by lowering the domestic price of imports."

What "trade-weighted" means

When people talk about the Australian dollar, they usually mean its value against the US dollar. But Australia trades with many countries, so a single exchange rate does not tell the full story.

The trade-weighted index, or TWI, measures the Australian dollar against a basket of currencies, with each weighted according to its importance in Australia's trade. A 5 per cent rise in the TWI means the dollar has strengthened broadly, not just against one currency.

As at 4.00 pm on 9 October 2026, the RBA's published rates showed:

  • TWI: 64.8
  • AUD/USD: 0.6979, or 69.79 US cents
  • Chinese renminbi: 4.6738
  • Japanese yen: 110.34
  • Euro: 0.6215

Kent's 5 per cent figure covered the period from the start of the year to mid-August, when he spoke. The 9 October data give a later snapshot, but on their own they do not show how far the currency has moved since then. These figures are a reading on a single day. Exchange rates move constantly, and the RBA's figures should not be read as a guide to where the currency is heading.

How a stronger dollar fights inflation, slowly

The mechanism Kent described is straightforward. When the Australian dollar buys more foreign currency, imported goods become cheaper in local terms. That includes everything from consumer electronics to machinery and components used by Australian businesses.

Lower import prices can then flow through to the prices consumers pay, helping to offset some of the inflationary pressure building elsewhere in the economy.

That offset is relevant at a time when several imported price pressures are pushing the other way. The Monetary Policy Board's 29 September statement listed a broader Middle East conflict and higher global energy prices, along with AI-related demand pushing up technology goods prices, among the upside risks flagged in August that were now materialising. A firmer currency can soften, though not eliminate, the local impact of those global price rises.

Governor Michele Bullock also discussed the currency at her 29 September media conference, saying "the most important channel is the exchange rate channel." She added a note of caution: "The exchange rate channel takes a while to feed through."

That lag is important. Importers may hold existing stock bought at older exchange rates, or have contracts priced in advance, so a stronger dollar does not show up in shop prices overnight. The same is true of interest rates more broadly. Bullock said policy can take "12, perhaps even 18 months" to work through fully, and that "A lot of that effect is still to flow through" from the rises earlier this year.

The restrictive stance in context

Kent's August remarks came when the cash rate stood at 4.35 per cent, following three rises earlier in 2026. At that point, he said "the Board judged that monetary policy is somewhat restrictive" and that "The current cash rate is around the top of the range of central estimates of the neutral rate."

He also said "the three cash rate increases earlier this year are having their intended effects," pointing to developments in the housing market and lending. "Lending and deposit rates have increased in line with the cash rate," he said, adding that "Scheduled mortgage payments have risen and are now close to their 2024 peak as a share of household disposable income." He noted that "housing credit growth, which moves closely with housing prices, has started to slow."

In other words, the interest rate channel was already visibly at work through household budgets and the housing market, while the exchange rate was adding its own, more gradual, restraint on prices.

Since then, the Board has raised the cash rate target by a further 25 basis points to 4.60 per cent, effective 30 September. It judged that "a further tightening of financial conditions" was warranted to return inflation to target within a reasonable period.

Inflation remains the central concern. Headline inflation, measured by the monthly CPI indicator, was 4.0 per cent over the year to August. Over the year to the June quarter, headline CPI was 3.9 per cent and trimmed mean, the RBA's preferred underlying measure, was 3.6 per cent. Bullock described underlying inflation as "about 3.5 per cent", roughly a percentage point above the 2.5 per cent midpoint of the 2–3 per cent target range.

What to watch

Financial markets have been in focus more broadly. On bond markets, Bullock said at her media conference that "the bond markets are reacting in an orderly way" and that the RBA is "not alarmed, but we are alert to it."

Kent is due to speak twice in the coming days: an interview at 11.00 am on 18 October, and a fireside chat at the CBA Global Markets Conference at 10.05 am on 19 October. The next CPI release is on 28 October and the next monetary policy decision is due at 2.30 pm on 3 November, which the Board has not pre-empted. "I'm not going to give you forward guidance," Bullock said.

The bottom line

The cash rate is the RBA's main tool, but it is not the only force acting on inflation. Kent highlighted a roughly 5 per cent trade-weighted rise in the Australian dollar since the start of the year, noting that a higher exchange rate helps moderate inflation by lowering the domestic price of imports. Bullock has called it the most important channel while cautioning that it takes time to feed through. With global energy and technology prices adding pressure, the currency's quiet role is one more factor the Board weighs as it assesses whether inflation is on track to return to target.