Australian bonds gain on RBA’s dovish economic assessment, further easing on cards

The Australian government bonds gained Friday, following a dovish economic assessment from the Reserve Bank of Australia’s monetary policy statement. Also, the report paved way for further easing in the near-term.

The benchmark 10-year Treasury note's yield, which moves inversely to its price, fell 7-1/2 basis points to 1.890 percent and the yield on short-term 3-year note dipped 1 basis point to 1.437 percent by 05:30 GMT.

The central bank, in its quarterly statement, on monetary policy concluded that the underlying inflation is expected to remain under 2 percent for much of the forecasted period, and is likely to reach 2 percent by end 2018.

The statement judged risks associated with rising house prices and construed that the Australian dollar remained a significant source of uncertainty for inflation and growth forecasts.

Moreover, the RBA also kept its economic growth and inflation forecasts unchanged. The apex bank forecasts underlying inflation to reach 1.5 percent by end of 2016, 1.5 to 2.5 percent by end of 2017 and 1.5 to 2.5 percent by 2018.

Also, the RBA forecasts GDP growth to reach 2.5 percent to 3.5 percent by the end of 2016, 2.5 to 3.5 percent by end of 2017 and 3 to 4 percent by 2018-end. Additionally, the unemployment would fall only a little till 2018, while employment growth likely to be modest this year, they added.

The report also mentioned that drag on gross domestic product (GDP) is driven by declining mining investment, non-mining still remains subdued. However, dwelling investment would stay strong for next year, but because of the higher risk of oversupply, GDP growth seems to have moderated in the second quarter as net exports contributed less.

The RBA noted that increasing supply amid steel cutbacks by China will put downward pressure on iron ore prices. Further, growth in China is expected to slow gradually over next few years and the Brexit is likely to have limited effect on Australia's major trading partners.

In terms of recent economic data, Australia’s July construction PMI fell to 51.6 from 53.2 in June, expanding for a second consecutive month. However, the pace of growth moderated slightly from June's 10-month high level.

Lastly, investor’s key focus will remain on the July US employment report, which is scheduled to be released on Friday at 18:00 GMT.

Meanwhile, the benchmark Australia's S&P/ASX 200 index traded flat at 5,449 by 05:30 GMT.