Inflation might be soft but rates traders are still betting on an RBA hike later this year

Rates traders didn’t blink at the soft December quarter inflation numbers with swaps markets still leaning towards a central bank cash rate hike in the second half of the year.

Interest rate swaps for the Reserve Bank of Australia’s October meeting stands at 1.52% slightly down from 1.54% seen before the inflation read at 11:30 am. before the CPI numbers, interest rate swaps were for October were at 1.54 per cent. While that has halved the possibility of a rise to 8%, the reaction is muted compared to the currency markets where the Aussie tumbled.

This chart, tweeted by ANZ Bank rate strategist Martin Whetton, shows the rates market expectations.

Data Wednesday showed both headline and core consumer price inflation (CPI) undershot market expectations. The headline CPI rose by 0.5% during the quarter, below the 0.7% increase expected. It previously grew by 0.7% in the September quarter. Core inflation also undershot, rising 0.4% for the quarter. Markets had expected an increase of 0.5%. Despite the softer-than-expected quarterly outcome, upward revisions to prior data saw year-on-year rate print at 1.55%, marginally ahead of the 1.5% increase expected. The Reserve Bank of Australia has a target of 2-3% medium-term core inflation target.

A weak inflation print in March last year prompted the RBA to cut rates in May and August that pushed the cash rate to a record low of 1.5%.

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