Australian Dollar Falls, Bond Prices Rise as Inflation Eases Rate Hike Risks

Data showed that Australia's core inflation rate for the second quarter came in below market expectations, causing the Australian dollar to fall and bond prices to surge, reflecting investors' sharp downgrade in the likelihood of a near-term rate hike by the Reserve Bank of Australia (RBA).

Official data released on Wednesday (29th) revealed that Australia's key core inflation measure, the trimmed mean, rose only 0.8% this quarter, below economists' forecast of 0.9%; the annual growth rate reached 3.6%, also below the previously expected 3.8%.

This is welcome news for the RBA, which has already raised interest rates three times this year to 4.35%, aiming to bring inflation back into the 2% to 3% target range.

Following the data release, market pricing for a rate hike at the RBA's August 11 meeting plummeted from 22% to just 2%. The Australian dollar fell 0.4% against the US dollar to 0.6946. Meanwhile, the bond market performed strongly, with the 10-year government bond yield dropping 7 basis points to 4.902%.

Luci Ellis, Chief Economist at Westpac, stated that due to inflation being more subdued than expected, the bank no longer anticipates an RBA rate hike this year. Abhijit Surya, Senior Economist at Capital Economics, also believes the soft core inflation data will prompt the RBA to hold rates steady at its next meeting.

Nonetheless, RBA Governor Michele Bullock has indicated that if inflation fails to cool as expected, there remains room for rates to rise, and current cost pressures and the energy crisis still pose challenges. Experts warn that while the base scenario is stabilizing, there remains a risk of a rate hike in November if inflation rebounds in the third quarter.