Bond investors have slashed expectations for another interest rate rise from the Reserve Bank of Australia this year after a soft inflation print on Wednesday suggested the economy was cooling at a faster clip than even the central bank had expected.
Traders have all but abandoned their bets for an August rate increase, pricing in just a 3 per cent chance of a move higher when the RBA board convenes in less than a fortnight.
Before the data release, the market had priced in a roughly 21 per cent chance of a rate rise.
Consumer price index data for the June quarter showed core inflation – the central bank’s preferred measure – held at 3.6 per cent on an annual basis, which was below the 3.7 per cent forecast. Headline inflation also undershot forecasts, slowing to 3.8 per cent.
Wednesday’s data release extended the whipsaw in bond markets that kicked off last week when robust employment figures boosted bets for an August rate rise to as much as 33 per cent at one point.
“Everybody has to change their mind when you get a surprise of this size,” said Barrenjoey chief interest rate strategist Andrew Lilley of the CPI data.
He said both the quarterly trimmed mean and headline inflation number had undershot the RBA’s forecasts by the biggest margin since 2022.
Lilley also noted the inflation figures were unaffected so far by the three previous rate rises handed down by the RBA in the first half of the year.
This would fuel concern that the central bank had overestimated the strength of Australia’s economy, he said.
“The RBA is going to be a little bit nervous about where the economy is going to be in six months’ time,” he said.
“It does appear that the economy was slowing in the second quarter, both in pricing terms and in terms of the labour market.”
Source: https://www.afr.com/markets/debt-markets/everyone-has-to-change-their-mind-traders-axe-rba-rate-rise-bets-20260729-p60jk8