Australian bonds continue to rally after RBA cuts interest rate to new record low

The Australian government bonds continued to rally on Tuesday after the Reserve Bank of Australia lowered its key interest rate by 25 basis points for the first time in last three months to a new record low of 1.50 percent.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell 8 basis points to 1.824 percent and the yield on short-term 2-year note dipped 10 basis points to 1.436 percent by 05:40 GMT.

The Reserve Bank of Australia (RBA) lowered its official cash rate (OCR) by 25 basis points to new record low of 1.50 percent, after having cut it by 25bps in May to 1.75% to spark historically weak inflation. This decision was made by the central bank to desperately try to recover the dwindling consumer inflation, which is below the Reserve Bank of Australia’s (RBA) target band of 2-3 percent. Also, strengthening Australian dollar pushed the central bank of a 25 basis points cut.

Last week, Australia’s second quarter headline consumer price index (CPI) increased just 0.4 percent q/q, in line with expectations, as compared to negative 0.2 percent in the previous quarter. Also, core inflation rose 0.5 percent q/q, a bit higher than the consensus of 0.4 percent q/q, from 0.2% in the first quarter of 2016.

On an annual basis, it eased 1 percent y/y (it was the lowest annual rate since 1999), marginally lower than the economist consensus of 1.1 percent, from 1.3 percent during the same period a year ago. However, core-CPI remained flat at 1.7 percent y/y, higher than the expectations of 1.5 percent y/y.

In addition, Australia’s June building approvals fell -2.9 percent m/m, consensus expectation was for 0.8 percent m/m, from down -5.2 percent in May, revised from -5.2 percent. Further, it fell -5.9 percent y/y, the consensus was for -2.4 percent fall, as compared to  down -9.2 percent, revised from -9.1 percent.

Similarly, Australia trade balance fell to -3.195 billion in June, higher than the market expectations of -2 billion, from down -2.218 billion in May. Also, the country’s exports dipped 1 percent m/m, which also boosted demand for safe-haven buying.

Lastly, investors will remain keen to focus on the upcoming quarterly Statement of Monetary Policy on Friday, which will update economic growth and inflation forecast for the country.

Meanwhile, the benchmark Australia's S&P/ASX 200 index was also trading down 0.30 percent or 16.5 points at 5,507.5 by 05:40 GMT.