Australian dollar jumps as markets wagers on more RBA hikes

By Wayne Cole

SYDNEY, Feb 3 (Reuters) - The Australian dollar jumped on Tuesday after the country's central bank raised interest rates for the first time in two years in an effort to restrain inflation, leading markets to wager that at least one more hike would be needed this year.

The Reserve Bank of Australia lifted its cash rate by 25 basis points to 3.85%, thus undoing some of the 75 basis points in easing delivered in 2025. It also joined the Bank of Japan in tightening policy.

The RBA's economics unit also raised its forecasts for inflation this year and next, despite building in a technical assumption of 60 basis points of tightening in 2026, suggesting policy risks were to the upside.

"It's clear that the RBA believes the road to disinflation will be a long and winding one," said Abhijit Surya, senior APAC economist at Capital Economics.

"Our base case is that the Bank will only deliver one more 25bp hike, most likely in May," he added. "However, given that the Bank doesn't expect underlying inflation to return to the mid-point of its 2-3% target even by early-2028, it's entirely possible that it will feel compelled to raise rates even higher."

Markets moved to price in around an 80% chance the RBA would hike to 4.10% at its May meeting, which would follow data on first-quarter inflation released in late April. 0#AUDIRPR

They also implied 42 basis points of tightening by December, and thus a real chance of two further increases this year.

The Aussie quickly climbed 1.2% to $0.7027 AUD=D3, more than recouping an overnight dip as the greenback bounced broadly. The rally re-opened the way to last week's three-year peak at $0.7094, while support sits at $0.6908.

Three-year bond futures YTTc1 slid 10 ticks to 95.640, having hit its lowest since late 2023 last week at 95.560.

Yields on 10-year bonds AU10YT=RR rose 6 basis points to 4.859%, nearer to last week's peak of 4.901% and 58 basis points above those offered by Treasuries.

The kiwi dollar followed with a rise of 0.7% to $0.6039 NZD=D3, after slipping 0.3% overnight and away from its recent high of $0.60925.

Investors assume the next rate move by the Reserve Bank of New Zealand will also be up, albeit not until later this year. 0#NZDIRPR