The Australian dollar hit a two-month low as traders pared back the chance of further interest rate rises after Reserve Bank of Australia governor Michele Bullock appeared less hawkish on inflation than anticipated.
The dollar fell to US69.88¢, a level last seen in late July, having shaved off 2.5 per cent this month. The rate-sensitive three-year government bond yield dropped 7 basis points to 4.97 per cent, while the 10-year rate lost 4 basis points to 5.38 per cent, away from a 15-year high of 5.43 per cent.
That’s despite the RBA raising the cash rate, as expected, to a 15-year high of 4.6 per cent at its policy meeting, saying some inflation risks have materialised and that it was prepared to hike further if needed.
Speaking after the decision, Bullock wrong-footed traders who had expected a stern warning about inflation.
Instead, the governor said that monetary policy worked with a lag of up to 12 months and the board wanted to see how the rate increases already delivered would affect the economy.
The RBA has led the developed world by raising rates four times this year.
“I think governor Bullock has a little bit of a habit of having a slightly different reaction in the press conference to the statement,” said Nic Guesnon, a rate strategist at UBS, referring to the central bank having surprised markets in the past with contrasting messages on the same day.
“The RBA is clearly not wanting to pencil themselves in needing to deliver another hike. They’re trying to retain optionality, and that lack of decisive hawkishness is what the market’s latched onto,” he said.
Traders reacted swiftly by paring back the chance of a November rate rise to 38 per cent, from 44 per cent before the meeting.
Markets remain fully priced for a fifth interest rate rise by February next year and imply a solid chance of another higher thereafter.
Barrenjoey chief rates strategist Andrew Lilley said Bullock had stressed it was too soon for inflation to have fallen given rates only started to rise six months ago.
“It’s probable that the board doesn’t believe they have to hike in November, as long as activity continues to slow,” he said.
Some strategists and traders have long felt that the market has overestimated how aggressive the RBA will ultimately be in raising rates.