Australia bonds gain after RBA keeps monetary policy intact, slightly dovish on inflation outlook

Australian government bonds gained across the board on Tuesday after the Reserve Bank of Australia (RBA) remained on hold in its August monetary policy meeting, held early today, while remaining slightly dovish on the country’s inflation outlook.

The yield on Australia’s benchmark 10-year Note, which moves inversely to its price, plunged 5-1/2 basis points to 2.67 percent, the yield on the long-term 30-year Note also slumped 5-1/2 basis points to 3.15 percent and the yield on short-term 2-year traded nearly 2-1/2 basis points lower 2.035 percent by 05:00 GMT.

According to the RBA’s latest monetary policy statement, the March quarter inflation outcomes were broadly in line with the forecast in the February Statement on Monetary Policy (SoMP) and confirmed that inflation remains low but stable. The low inflation outcomes reflect spare capacity in the economy and the associated low wages growth, as well as the ongoing downward pressure on retail prices due to increased competition in the sector.

Further, low wages growth over recent years has contributed to subdued inflation outcomes because wages are the largest component of business costs. There are a number of reasons for low wages growth: spare capacity remains in the labour market; inflation has been low and most parties expect it to remain so; and the economy has been adjusting to the end of the mining investment boom and the earlier terms of trade decline.

On the economic outlook, the RBA said that the forecasts are little changed from those presented in the February SoMP. Growth in the global economy has been solid. Global inflation remains low, but is expected to increase as spare capacity diminishes, particularly in some major advanced economies. Indeed, there is a risk that inflation will pick up more quickly than is currently expected, which would have implications for monetary policy decisions and financial markets.

Meanwhile, the S&P/ASX 200 index traded 0.33 percent lower at 6,190.50 by 05:10 GMT, while at 05:00GMT, the FxWirePro's Hourly AUD Strength Index remained neutral at 67.79 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex