Australian bonds gain as investors wary ahead of RBA policy decision

The Australian government bond gained Monday as investors remained cautious ahead of Tuesday’s monetary policy meeting for the Reserve Bank of Australia (RBA), where it is widely expected to keep interest rates on hold.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell 3 basis points to 2.355 percent, the yield on 15-year note dipped 2-1/2 basis points to 2.723 percent and the yield on short-term 2-year slid 4-1/2 basis points to 1.655 percent by 04:30 GMT.

The Reserve Bank of Australia will hold its monetary policy meeting on November 1, Tuesday and it is widely expected to keep its official cash rate (OCR) unchanged at 1.50 percent. Relieved by the strong print of Q3 consumer inflation, stabilizing economic growth and recovering energy prices, we also expect the central bank to hold its interest rate steady in 2016.

According to a recent Reuters poll, 55 of 60 economists foresee that the RBA will keep rates on hold at the November 1 upcoming meeting, while; 29 economists expect easing by mid-2017; however, 1 sees base at 0.5 percent.

We expect the RBA to hold the cash rate at 1.5 percent but retain its easing bias, with the statement following next week’s board meeting likely to be broadly unchanged from the previous month, said ANZ in its research note.

Australia’s third-quarter consumer inflation index (CPI) rose 0.7 percent q/q, beating market expectations of 0.5 percent q/q, from 0.4 percent in the second quarter of 2016. On an annual basis, it climbed 1.3 percent y/y, trended higher than the market consensus of 1.1 percent y/y, up from prior 1 percent (a 17-year low).

According to latest Reuters poll on the Australian economy, forecasts for inflation was at 1.2 percent for 2016, 2.1 percent in 2017 and 2.4 percent in 2018. Similarly, forecasts for GDP was at 2.9 percent for 2016 (also a poll in July showed the same result), 2.8 percent for 2017 and 2.9 percent in 2018.

Meanwhile, the benchmark Australia's S&P/ASX 200 index traded 0.94 percent higher at 5,301.5 by 04:40 GMT.