Australian dollar firm as RBA hikes rates in close call, sounds hawkish

By Wayne Cole

SYDNEY, March 17 (Reuters) - The Australian dollar swung higher again on Tuesday as the head of the country's central bank repeatedly warned about inflation risks and emphasised a close vote on hiking interest rates was a difference of timing not direction.

After initially easing, the Aussie edged up 0.2% to $0.7088 AUD=D3, on top of a 1.3% rally overnight. Support lies at $0.6945, with resistance at the recent 45-month top of $0.7122.

While the Reserve Bank of Australia lifted its cash rate by 25 basis points to a 10-month high of 4.10% as many expected, markets were surprised it came down to a single vote as the board split five to four.

Yet, in a media conference RBA Governor Michele Bullock said the argument was only about going now or waiting until May, and the board was still not sure if policy was tight enough to bring inflation to heel.

Markets took her tone as hawkish and nudged up the probability of a further hike in May to 40%, from 25%. A move to 4.35% is still fully priced by August. 0#AUDIRPR

"It is unlikely that a modest 50bp recalibration of monetary policy is enough to deliver outcomes consistent with inflation returning sustainably to the target band," argued Sally Auld, chief economist at NAB.

"We continue to expect a further 25bp rate hike in May."

Investors had been leaning toward a rise after top RBA officials warned the meeting would be "live" as core inflation of 3.4% was stubbornly stuck above the central bank's target range of 2% to 3%. AU/INT

"The decision was made by the narrowest of margins, raising some risks to our view that a follow-up hike could come as soon as May," said Abhijit Surya, a senior APAC economist at Capital Economics.

"The split vote appears to have come down to the elevated uncertainty about the evolution of the Iran conflict," he added.

Yields on 10-year bonds AU10YT=RR were down 3 basis points at 4.961%, having recently topped 5.0% for the first time since mid-2011. The spread over Treasuries had also widened to 72 basis points and levels not seen since mid-2022.

The kiwi dollar edged back 0.4% to $0.5843 NZD=D3, partly due to heavy selling against the Aussie. It has support at $0.5775 and $0.5712, while resistance lies around $0.5870.