Rising inflation reignites RBA feud with bond market

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His preferred measure of inflation beat expectations with an increase of 0.7 percent in the September quarter, bringing annual core inflation to 2.1 percent to be within the range. bank target range.

This is the highest annual reading in nearly six years for core inflation, which excludes large and one-time price impacts.

The Reserve Bank has said on several occasions that it wants to see inflation stay between its target range of 2-3% for a long time before raising the cash rate, and according to its forecasts, it does not expect for this to happen before 2024.

Debt markets increasingly believe the Reserve Bank’s forecasts are wrong. Economists too.

“Inflation is probably ahead of the RBA forecast,” said Su-Lin Ong, head of Australian and New Zealand fixed income strategy at RBC Capital Markets. “Prior to the November board meeting and the monetary policy statement, the RBA will need to conduct an assessment of the persistence of price pressures.”

AMP Capital was the first financial institution to advance its cash rate forecast following the inflation reading, effective at the November 2022 meeting.

“With the economy recovering, the conditions for the start of rate hikes will be in place by the end of 2022,” said Diana Mousina, senior economist at AMP. “We are now forecasting a slight increase in the cash rate from 0.1% to 0.25% in November of next year and an increase of 0.25% in December 2022.”

The yield on a large basket measuring three-year bond futures jumped 24 basis points to an implied return of 1.225 percent, a level not seen since May 2019. Three-year cash yields have increased. flew at 0.979 percent, the highest since July 2019.

Interest rate futures are forecasting nearly three rate hikes in the second half of next year, up from two on Tuesday.

The Australian dollar climbed to US 75.36, within reach of a three-month high of US 75.46.

On Friday, the Reserve Bank bought $ 1 billion worth of April 2024 bonds in an unscheduled open market operation to dampen performance and bolster its 2024 forecast. Yields initially fell at around 0.12%, close to the central bank target, but gradually sold off.

Analysts expect further intervention from the Reserve Bank in the coming days. “Today’s result poured more fuel into the front light,” Jarman said. “The RBA will likely have to push back with more yield curve controlling buying.”


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