Australian bonds jump as RBA’s monetary policy statement cites inflation concerns

Australian bonds jumped on the last trading day of the week Friday as investors covered in short positions after the Reserve Bank of Australia’s (RBA) monetary policy statement cited inflation concerns.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell 2 basis points to 2.84 percent, the yield on the long-term 30-year note dipped 2-1/2 basis points to 3.47 percent and the yield on short-term 2-year slid 4 1 basis points to 1.97 percent 03:30GMT.

Given the developments in financial markets over the past few months, it was a rather measured Statement on Monetary Policy from the Reserve Bank (RBA) released today. The underlying tone of the Statement was one which was still cautious on the outlook, particularly surrounding inflation and the degree of spare capacity within the economy.

The RBA’ notes that the labour market has been “particularly strong”. Nonetheless, the RBA still downplayed the labour market’s strength stating that it was “expected to moderate over the next few years”. The RBA lowered its unemployment rate forecast, but is expected to remain above the RBA’s estimate of full-employment of 5.0% out to June 2020. The RBA states “the economy is not expected to encounter broad-based capacity constraints for some time”.

The RBA also continues to highlight other uncertainties, including the degree of spare capacity in the labour market and whether the improving labour market will translate into strong wage growth.

On the growth and inflation outlook, there was minimal change to the RBA’s forecasts. The RBA still expects inflation to stay low and below the RBA’s target band till at least June 2019.

While the improvement in the domestic labour market and the global economy suggests that the next move in official interest rates will be up, the expectation that spare capacity will continue to persist suggests that the RBA would not be willing to lift interest rates for some time. We continue to expect the RBA will leave the official cash rate on hold for all of 2018.

Meanwhile, the S&P/ASX 200 index traded 1.60 percent higher at 5,774.5 by 03:30 GMT, while at 03:00GMT, the FxWirePro's Hourly AUD Strength Index slightly bearish at -94.55 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex

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