Australia’s 10-year government bond yield hovered around 5%, nearing multi-week highs as investors digested hotter-than-expected July inflation data. The monthly CPI rose 1.0% from June, beating forecasts for a 0.8% increase. On an annual basis, inflation eased to 3.5% from 3.8%, but still exceeded expectations of 3.3%.
The trimmed mean measure of core inflation climbed 0.5% in July, above the projected 0.3%, leaving annual underlying inflation at 3.6%. The upside surprises came despite repeated warnings from the Reserve Bank of Australia that inflation remains too high and that risks are skewed to the upside.
The RBA has already raised interest rates three times this year in an effort to return inflation to target, and Governor Michele Bullock said after the latest meeting that another hike was “quite possible.” In response, markets lifted the implied probability of a rate increase next month to 27% from 17%, while the likelihood of a move by February next year is now priced at 80%.
