Australia’s central bank kept its cash rate at a record low of 0.1% on Tuesday and ended its A$275 billion ($194.40 billion) bond buying campaign as expected, but pushed back on market wagers for an early rate rise.
Wrapping up its February policy meeting, the Reserve Bank of Australia (RBA) emphasised that ceasing bond purchases did “not imply” a near-term increase in interest rates and the Board was still prepared to be patient.
“As the Board has stated previously, it will not increase the cash rate until actual inflation is sustainably within the 2 to 3% target range,” RBA Governor Philip Lowe said in a brief statement. “While inflation has picked up, it is too early to conclude that it is sustainably within the target band.”
Dollar Slides on Dovish Outlook
The Australian dollar wobbled on Tuesday after the doggedly dovish outlook on policy, while markets are still baying for hikes to come as early as May.
The Aussie slid as much as 0.5% to $0.7021 in immediate reaction, but quickly steadied at $0.7052 as risk sentiment improved globally.
That left it above a recent 18-month trough of $0.6967, but a break of resistance at $0.7080 is needed to improve a still bearish technical background.
The kiwi dollar held at $0.6578, having bounced 0.5% overnight and away from a 16-month low of $0.6531. Resistance lies at $0.6590, while the next bear target is down at $0.6512.
Inflation Forecasts Raised
The Reserve Bank also sharply raised its inflation forecasts and lowered the outlook for unemployment, but argued it was not yet clear how persistent inflation would ultimately be.
The RBA Governor’s pronouncements were a blow to speculators who have wagered heavily that a hike could come as soon as May, and bank bill futures edged up as some of the more aggressive pricing was pared back.
Yet a move to 0.25% is still almost fully priced for May, along with another four hikes to 1.25% by year end.
“It was a clearly dovish message. The Governor has certainly gone out of his way to dissuade pricing for a hike in the first half of the year,” Westpac analyst Damien McColough said.
Westpac recently brought forward its call for a hike to August given strength in inflation and jobs.
“Our August meeting expectation appears well placed,” added McColough. “So while yields at the front end and out to 3-years will be lower, they will only be marginally so and we remain better sellers into strength, despite the RBA message.”
Yields on three-year bonds were down 2 basis points on the day at 1.17%, but off the low of 1.135%.
Attention now turns to a speech on policy from Lowe on Wednesday, while the RBA will publish its full economic forecasts on Friday.
- Reuters with additional editing by Jim Pollard
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