The Australian central bank yesterday kept interest rates at a record low in its first meeting of the year, with inflation still soft and the outlook for household spending uncertain.
Reserve Bank governor Philip Lowe made no mention of the sudden deterioration on financial markets in his regular post-meeting statement, preferring to accentuate the positives such as the broad-based pick up in the global economy a year ago.
On a positive note, the Reserve Bank of Australia mentioned that a further gradual reduction in the unemployment rate is expected.
The bank is sticking to its central forecast for Australian GDP growth to pick up, to average a bit above 3 per cent over the next couple of years.
The RBA maintains CPI inflation will edge into its 2-3 per cent target band later this year.
"While confidence, jobs and non-mining investment are strong, inflation remains below target, wages growth remains around a record low, uncertainty is high regarding the outlook for consumer spending and the Australian dollar is too strong", he said.
"This is likely to continue for a while yet, although the stronger economy should see some lift in wage growth over time", Dr Lowe said in a statement on Tuesday.
However, after the announcement, that implied probability had fallen closer to 30%, suggesting that the broader market has also become less optimistic in its outlook for Australian interest rates.
Speculation has been mounting that the next rate rise might now come within months after official data showed the economy grew by a better-than-expected 0.5% at the end of 2017, up from 0.4% in the third quarter.
"Inflation outcomes have remained weak. alongside that we continue to see growth outcomes as below trend", he said. The Pound-to-Australian-Dollar rate was quoted 0.19% higher at 1.7729.
The Reserve Bank board has held its first monetary policy meeting of 2018.
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Benchmark 10-year bond yields have risen more than 80 bps since July, the biggest move since the 2013 rupee crisis, due in large part to worries about a more hawkish RBI. Policymakers well know that too much fretting about inflation at this point will only support the Aussie further by making the market more firmly price in higher rates.
Domestic and worldwide economic developments, as well as recent price action in the bond market, have seen investment bank Morgan Stanley begin advocating that clients bet on a steep fall in the Australian Dollar relative to the Euro.
Australia's central bank will announce its latest interest rate decision at 03:30 am London time Tuesday.