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Highlights
- Aussie dollar strengthens after inflation data
- Bond yields climb amid shifting rate cut expectations
- Markets still see multiple rate cuts by year-end
Australia's March quarter inflation figures have added some heat to financial markets, nudging the local currency higher and causing a slight uptick in bond yields, even as investors largely continue to price in a rate cut by the Reserve Bank of Australia (RBA) in May.
The Australian dollar (ASX:AUDUSD) firmed to US64¢ from US63.85¢ following the data release, as inflation came in hotter than forecast. Despite the inflation surprise, the market view remains that monetary policy easing is likely to begin soon. Current market pricing suggests a 98% probability that the RBA will lower the cash rate by 25 basis points to 3.85% at its next meeting on May 20.
The upward surprise in inflation data did dampen the extent of expected rate cuts somewhat. Prior to the report, traders had been betting on a more aggressive easing path, with implied cuts totaling 122 basis points. This has now eased to around 116 basis points, which would translate to at least four rate cuts before the end of the year.
Bond markets reacted swiftly to the updated inflation outlook. The yield on three-year Australian government bonds, which are highly sensitive to changes in interest rate expectations, rose by 3 basis points to 3.31%. Meanwhile, the 10-year bond yield edged up 1 basis point to 4.12%.
The inflation surprise presents a nuanced backdrop for the RBA, which has been balancing the need to support economic growth while keeping inflation within its target range. Although the latest figures suggest price pressures remain, the broader trend has been moving in a direction that supports monetary policy easing.
Market participants remain largely aligned in their view that the RBA will commence a rate-cutting cycle in the coming months. This expectation continues to underpin movements in both currency and bond markets. The decision ahead will hinge on how the RBA weighs persistent inflationary signals against broader economic indicators pointing to slower growth.
As always, upcoming economic data and global market trends will play a key role in shaping the trajectory of the Australian economy and its financial markets through the rest of 2025.
