FX.co ★ AUS 10Y Yield Retreats from Multi-Week Highs

Australia’s 10-year government bond yield retreated to around 4.9%, pulling back from multi-week highs as softer inflation data tempered expectations of further interest rate increases. Headline inflation unexpectedly slowed to a four-month low of 3.8% in June, down from May’s reading and below the 4.0% consensus forecast. At the same time, monthly consumer prices declined 0.1% for a second consecutive month, contrary to expectations of stability or an increase.

The closely watched trimmed mean inflation rate rose 3.6% year-on-year, slightly below the anticipated 3.7%, while quarterly core inflation advanced 0.8%, also missing forecasts. Although inflation remains above the Reserve Bank of Australia’s 2%–3% target band, markets sharply reduced the implied probability of another rate hike this year to about 50%, down from more than 90% before the data release. The weaker readings have also strengthened expectations that the RBA is unlikely to resume policy tightening at its August 11 meeting. Nonetheless, the RBA governor has recently cautioned that an additional rate increase may still be required to return inflation to target.