SYDNEY: The Australian dollar was slapped lower on Tuesday after the country’s central bank disappointed bulls by skipping a hike in interest rates, though it did warn further tightening might be needed to tame inflation.
The Reserve Bank of Australia (RBA) held its cash rate at 4.1%, saying the decision for “this month” was to allow time to asses the impact of past hikes and the economic outlook.
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe,” RBA Governor Philip Lowe added in a statement.
Australian dollar hits 3-week low, yields fall after sharp slowdown in inflation
Investors had been in two minds on whether the RBA would move, so the reaction was swift with the Aussie slipping 30 ticks to $0.6650 and testing support around $0.6640. Three-year bond futures recouped early loses to stand steady at 96.070.
Futures markets had implied around a 60% chance of a steady decision, while economists polled by Reuters had leant toward another quarter-point hike.
The market has now shifted to imply around a 50-50 chance of a hike to 4.35% in August, while scaling back the risk of a further move to 4.6%.
“ This looks a wait and see meeting to gauge of impact from previous tightening,“ said Dwyfor Evans, head of APAC Macro Strategy at State Street Global Markets.
“The bias of the remarks are sufficiently hawkish to keep further hikes on the table and ensure August remains a live meeting for policy change.”
Yields on three-year bonds eased to 4.0%, from an early top of 4.09%, leaving them a fraction below 10-year yields. The recent inversion of the yield curve is a rare event usually only associated with a sharp economic slowdown, pointing to some risk of a recession.
“The RBA is now trying to finesse policy to avoid a hard landing,” said Andrew Canobi, director fixed income at Franklin Templeton. “It’s a delicate process as policy is already very restrictive in our view.”
“If we see key data ease in July, we may see more conviction emerge that the peak for rates is in.”
The kiwi dollar also dipped 20 ticks on the news to $0.6144.
The Reserve Bank of New Zealand (RBNZ) holds its next policy meeting on July 12 and is widely expected to hold rates at 5.5%, having hiked by a total of 525 basis points since late 2021.