Australian dollar climbs as RBA hikes, sounds hawkish on outlook

SYDNEY: The Australian dollar jumped on Tuesday after the country’s central bank hiked interest rates for a ninth straight policy meeting and said “further increases” would be needed, a more hawkish outlook than many had expected.

The Aussie was up 0.8% at $0.6938, recouping all of an overnight fall but still short of last week’s eight-month peak of $0.7158. The New Zealand dollar added 0.3% to $0.6325, bouncing from a low of $0.6271 touched overnight.

The Reserve Bank of Australia (RBA) lifted its cash rate by 25 basis points to a decade-high of 3.35%, much as the market expected, but surprised some by saying further “increases” would be necessary and implying more than one more hike.

The central bank also omitted its previous condition that policy was not on a “pre-set path”, suggesting further rate rises were more likely than not.

“Any expectations around a pause in the hiking cycle were largely dissipated on explicit comments around the need for further rate hikes, a comment that has embedded a hawkish bias to remarks,” said Dwyfor Evans, head of APAC macro strategy at State Street Global Markets.

“The hawkish report will give the AUD some support against other G10 central banks where the hiking cycle is well discounted.”

The RBA also noted that core inflation had been higher than expected at 6.9% in the December quarter and emphasised that higher rates were needed to ensure that inflation returns to its target range of 2-3%.

Markets moved quickly to price in a top of 3.85% in the wake of the decision, when most analysts in a Reuters poll had thought rates would peak at 3.60%.

Bond markets took it badly with three-year futures sliding 16 ticks to 96.740.

Australia dollar scales fresh 8-month high after dovish

That left them down over 25 basis points since last week’s upbeat US jobs report added to the risk of more tightening by the Federal Reserve.

Yields on 10-year bonds popped up to 3.59%, having climbed 22 basis points in just three sessions.

The Reserve Bank of New Zealand (RBNZ) holds its next policy meeting on Feb. 22 and is widely expected to lift rates by 50 basis points to 4.75% and also flag further tightening ahead given inflation is running hot at 7.2%.

Markets imply rates will peak at 5.25%, a little below the central bank’s own projection of 5.5%.