Bond traders have significantly reduced their expectations of another interest rate cut by the Reserve Bank of Australia (RBA) following the release of alarming inflation data. Some market participants are now speculating that the next policy move by the RBA will be an increase, rather than a decrease, in interest rates.
Money markets are currently implying only a 15 per cent probability of an easing of monetary policy in the first half of next year, a substantial drop from the 23 per cent probability priced in on Wednesday. Furthermore, markets are now pricing in a total of 12 basis points of interest rate increases by late 2026, up from seven basis points previously. This change is equivalent to approximately a 50 per cent chance of a rate hike over that period.
The shift in sentiment was also reflected in the bond market. The policy-sensitive three-year government bond yield rose to 3.89 per cent, its highest level since February, before settling slightly lower at 3.84 per cent. The 10-year government bond yield also experienced upward pressure, reaching 4.53 per cent, a level not seen since May. It is currently trading at 4.48 per cent.
