SYDNEY: The Australian dollar pared early gains on Tuesday after the country’s central bank stayed with quarter-point rate hikes, disappointing some bulls who had wagered on a larger move.

The Aussie eased back to $0.6424, from a top of $0.6446, but was still firmer on the day. It found support around $0.6368 overnight but remains well short of last week’s peak of $0.6552.

The kiwi dollar gained to $0.5840, after drawing support at $0.5776 overnight. Resistance lies at last week’s high of $0.5870.

The Reserve Bank of Australia (RBA) lifted its cash rate 25 basis points to 2.85%, bringing the tightening since May to an eye-watering 275 basis points, and reiterated that further tightening was likely.

Markets had been leaning toward a quarter-point move given the central bank only downshifted from half-point hikes in October. Yet some had looked for a return to outsized rises after consumer price inflation shot to a 32-year high of 7.3% in the third quarter, well above analyst expectations.

The RBA did revise up its forecasts for inflation which it now sees reaching around 8%, this quarter rather than 7.75%, and only slowing to 4.75% by the end of next year. Investors reacted by lengthening the odds on a half-point move in December, while trimming the likely peak for rates to 3.90% from 4.0% ahead of the decision.

“While inflation remains the main game, the outlook for growth has also deteriorated, with the RBA’s forecasts for the second half of this year and next coming down,” said Sean Langcake, head of macroeconomic forecasting for BIS Oxford Economics.

“Against the backdrop of weaker growth, the risks of overtightening and exacerbating the slowdown are growing.” Yields on 10-year bonds dipped to 3.78% and away from a recent top of 4.23%.

Australian dollar wobbles ahead of RBA, NZ$ having best month in a year

They were also a hefty 24 basis points under Treasury yields, reflecting wagers that US rates will peak above those in Australia. Over in New Zealand, the bond market was celebrating being included in the FTSE-Russell World Government Bond Index for the first time.

That was expected to attract more offshore demand for kiwi debt, and thus into the currency as well.

Yields on 10-year paper stood at 4.29%, having fallen from a nine-year top of 4.825% over the past week.