Traders are pricing in aggressive interest rate increases by the Reserve Bank of Australia and are challenging its three-year yield target amid uncertainty over global inflation.
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Markets are now suggesting that the RBI will begin hiking in mid-2022, even after the central bank reiterated Tuesday that conditions for a rate increase would not be met before 2024. At the same time, yield on the April 2024 security targetted by the RBA touched 17 basis points, compared with a target of 0.1%.
There are a confluence of factors that will likely intensify in the coming months, said Su-Lin Ong, head of the Australian economic and fixed-income strategy at Royal Bank of Canada. Markets will doubt the RBA's policy of holding rates:
None A shift in the global central bank policy that accelerated recently led by the Bank of England.
None A more complex inflation picture with less transitory elements in key economies; and
Increasing downside risk to activity in Australia s eastern states as they emerge from protracted lockdowns.
Policy makers worldwide are struggling to grasp whether faster inflation is a result of supply-chain disruptions or something more permanent. New Zealand consumer prices surged to almost 5% in the third quarter compared with a target on the central bank in the middle of 1 - 3% band, and the U.S. and U.K. are struggling with mounting wage pressures
Australia is caught up in this weaker inflation maelstrom despite emerging inflation costs. The RBA is running record low rates and a yield target to try drive down unemployment and fuel faster wage growth.
Australia will post consumer-price data on Wednesday, and the risk is that it will also report an unexpected acceleration.
While it was possible that domestic inflation would build faster than currently envisaged, the central forecast scenario was still that underlying inflation would pick up only gradually over the medium term, the RBA said in minutes of its October meeting on Tuesday.
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