A growing cohort of economists is warning that the Reserve Bank of Australia (RBA) is likely to deliver one more interest rate increase this year, contradicting the market consensus that has largely priced out further tightening.
While investors have reacted with relief to a recent benign inflation report, analysts argue that underlying pressures suggest the central bank is not yet done with its hiking cycle.
The disconnect between market pricing and economic forecasts highlights a significant risk for bond traders.
Following a stronger-than-expected June employment report, bond markets had rapidly repriced expectations, assuming the labor market strength would be offset by cooling price pressures.
However, the latest analysis suggests that inflation may pick up steam again, keeping the RBA on a hawkish trajectory.
This divergence creates a volatile environment for Australian government bonds.