The Australian dollar and bond yields jumped after the Reserve Bank unanimously voted to raise the cash rate for the first time since 2023, though traders were left in the dark as to just how much further the central bank would go to bring inflation under control.
The decision by all nine members of the RBA board to raise the cash rate by a quarter of a percentage point to 3.85 per cent propelled the Aussie above US70¢, nearing a three-year peak of US70.94¢. The expectation by the market was that at least one member would vote to keep rates on hold.
Bond markets also reacted swiftly to the decisive policy decision, with the three-year bond yield, which reflects cash rate expectations, reaching 4.36 per cent, the highest level in more than two years.
However, in the last hour of trading, as RBA governor Michele Bullock addressed the media, the rate fell back to 4.28 per cent as her comments were perceived by the market as being slightly less hawkish than the decision and statement had initially implied.
Charlie Jamieson, the co-founder of Jamieson Coote Bonds, in particular noted Bullock’s comment that she was not sure if the central bank was in a “tightening cycle”, which means a series of rate increases.
“The market took that as small dovish phase, clearly they will go slow and let the data lead them,” Jamieson said.
The central bank cut the cash rate three times in 2025 but a resurgence in inflation towards the end of the year prompted markets to wildly swing from pricing in rate cuts to rate rises in a matter of weeks.
Tano Pelosi, a former portfolio manager at Antares who now teaches investment management at Macquarie University, said Bullock “tempered her hawkishness” in the media conference.
“They need to be more decisive and less incremental,” he said. “The market is underpricing the risk of an increase in March. By then, they will have enough fresh economic data to go again.”
Other investors also believe further rate increases are inevitable, regardless of Bullock’s comments because inflation is too strong and above the central bank target of between 2 per cent and 3 per cent.
“There’s no way the RBA is one and done,” said Australian Ethical senior portfolio manager Chris Dickman. “Given the breadth of inflation pressure, the projection that inflation would be back in target by early 2027 seems to be a hope more than a core belief.”
Source: https://www.afr.com/markets/debt-markets/rba-chief-tempers-rate-rise-bets-as-yields-a-jump-20260203-p5nz18