SYDNEY: The Australian dollar lost some ground on Friday after the country’s central bank insisted it was in no rush to hike interest rates, even as markets globally howled for aggressive tightening in the face of rising inflation.
The Aussie faded to $0.7147, after hitting a top of $0.7248 overnight, though that still left it up 1% on the week and well away from the recent trough of $0.6967.
Reserve Bank of Australia (RBA) Governor Philip Lowe emphasised there were risks in tightening too early, though he did imply a hike was plausible from August onwards should the economy perform as well as expected.
That was too dovish for investors who are wagering the RBA will have to follow the US Federal Reserve and act early. Indeed, markets are pricing in a real risk the Fed will hike by a full 50 basis points in March following another shockingly high reading on US inflation out Thursday.
Futures are pricing in an RBA move to 0.25% by June and four more hikes to 1.25% by year end.
“The RBA message around this is that the Board is prepared to be patient, more so than countries with higher inflation,” said Belinda Allen, a senior economist at CBA.
“We continue to expect inflation to accelerate from here and be supported by rising wages growth,” she added. “We remain comfortable for the first rate hike in August.”
Debt markets are not so comfortable, as a surge in US Treasury yields has hammered bonds globally. Yields on Australian 10-year paper have shot up 22 basis points this week to 2.19%, heights last seen in early 2019.
New Zealand 10-year yields were up 21 basis points at 2.815%, a peak last seen in November 2018. The kiwi dollar added 0.6% for the week to $0.6651, but could not sustain an overnight high of $0.6733.
The Reserve Bank of New Zealand (RBNZ) has already raised rates twice to 0.75% and is almost certain to hike again later this month, and perhaps by 50 basis points.
A survey from the central bank out on Friday showed an alarming jump in inflation expectations to 4.40% for one year out, and to 3.27% for two years ahead.
“The extent of today’s increase will likely cause some hand wringing at the central bank,” said Westpac economist Satish Ranchhod.
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