Australian bonds rally ahead of RBA decision; weak Q2 inflation raises rate cut hopes

The Australian government bonds rallied on Thursday as investors remain cautious ahead of the Reserve Bank of Australia’s (RBA) monetary policy meeting, which is scheduled to take place on August 2 at 04:30 GMT.

Also, Bloomberg’s implied probability of 25 basis points rate cut by the RBA is at 59.4 percent for the next week’s meeting and the same is at 64.7 percent for September monetary policy meeting.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell 8 basis points to 1.886 percent and the yield on short-term 2-year note dipped nearly 5 basis points to 1.539 percent by 05:30 GMT.

On Wednesday, Australia’s second quarter headline consumer price index (CPI) increased just 0.4 percent q/q, in line with expectations, as compared to negative 0.2 percent in the previous quarter. Also, core inflation rose 0.5 percent q/q, a bit higher than the consensus of 0.4 percent q/q, from 0.2% in the first quarter of 2016.

On an annual basis, it eased 1 percent y/y (it was the lowest annual rate since 1999), marginally lower than the economist consensus of 1.1 percent, from 1.3 percent during the same period a year ago. However, core-CPI remained flat at 1.7 percent y/y, higher than the expectations of 1.5 percent y/y.

Moreover, this result is still well below the RBA's target range of 2-3 percent and keeps an interest rate cut next month firmly on the cards.

However, bets on a Reserve Bank rate cut next month have fallen from around a 65-70 per cent probability on Monday to a 50-60 call now, according to futures and money market data from Bloomberg, reported ABC news.

Meanwhile, the benchmark Australia's S&P/ASX 200 index was also trading up 0.11 percent or 5 points at 5,515 by 05:40 GMT.