Australia Central Bank Foresees Need for Higher Rates to Contain Inflation

Australian bond market was weaker after the central bank reiterated that the next direction for interest rates was up even though a time frame was not given.

At 1630 AEST on Tuesday, the June 10-year bond futures contract was trading at 94.610 (implying a yield of 5.390 per cent), down from 94.660 (5.340 per cent) on Monday.

The June three-year bond futures contract was at 94.920 (5.080 per cent), down from 94.950 (5.050 per cent).

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On Tuesday, the Reserve Bank of Australia (RBA) released the minutes of its May 3 board meeting that showed it still believed an interest rate rise was in the pipeline but was unclear when that would happen.

The RBA left the cash rate at 4.75 per cent in early May - a level unchanged since November 2010.

Treasury secretary of Australia said the local currency will stay elevated “for some time,” a rise the central bank signaled would help contain inflation spurred by the nation’s biggest mining-investment boom.

The Australian dollar, which is currently at record levels, can be expected to move roughly in line with the terms of trade over the longer term,” Martin Parkinson, the Treasury’s top bureaucrat, said in a speech today in Sydney, referring to a measure of export income. “It is therefore expected to also remain persistently high for some time.”

Reserve Bank of Australia Governor Glenn Stevens has kept the benchmark interest rate at 4.75 percent after seven increases in the overnight cash rate target from October 2009 to November last year, moves that contributed to a 21 percent gain in the currency in the past 12 months.

The market has forecast hourly rates of pay, excluding bonuses, to rise by 1.1 per cent for the quarter.

Mr Johnson said the data would be crucial for the outlook on inflation and interest rates.

"I think that if the wages number is high it's a problem, but even if it is not high I suspect we've got a wages problem brewing already given the weak productivity performance."

Mr Johnson said the key piece of economic data on Tuesday night AEST would be the UK inflation figures.