By Wayne Cole
SYDNEY, July 26 (Reuters) - The Australian dollar stumbled on Wednesday as dovish comments from the country's central bank and a subdued reading on inflation further dimmed the likelihood of a hike in interest rates any time soon.
The Aussie backtracked to $0.7895 AUD=D4 , from an early $0.7942 and a recent two-year peak of $0.7992. Dealers said offers remained thick around the 80 cent barrier, but there were also good bids down to $0.7876.
With all the focus on the Aussie, the New Zealand dollar NZD=D4 spent a quiet session idling at $0.7417 and short of its recent top of $0.7460.
The first blow to the Aussie came when official data showed consumer prices rose by a smaller-than-expected 1.9 percent in the year to June, while underlying inflation stayed below target for a sixth straight quarter. L3N1KH1QQ
That was quickly followed by comments from Reserve Bank of Australia (RBA) Governor Philip Lowe that he was "very comfortable" with interest rates at record lows and saw no reason to match hikes by central banks elsewhere in the world.
"Lowe's comments are as close as RBA is likely to get to implicitly acknowledging a low-for-long outlook for the policy rate," said Sally Auld, rate strategist at JPMorgan (NYSE:JPM).
"Rates clearly aren't rising until the RBA is confident that wages growth and inflation are lifting," she added. "The policy of least regret appears to be a protracted period of policy stability."
Investors have taken the hint and interbank futures 0#YIB: currently imply only an 8 percent chance of a rate rise by December and 34 percent by March next year.
Australian government bond futures pared overnight losses, with the three-year bond contract YTTc1 off 2 ticks at 97.980 and the 10-year YTCc1 down 4.5 ticks at 97.2650.
That still leaves Australian rates well above most of its peers in the developed world. Australian 10-year bonds pay 2.74 percent AU10YT=RR compared to 2.32 percent in the United States, 56 basis points in Germany and 8 basis points in Japan.
That gap, combined with very low market volatility globally, is drawing investors into carry trades, borrowing cheaply in say yen to buy Aussie dollars.
While the Aussie dipped slightly to 88.43 yen on Wednesday AUDJPY= , that was only just off a 19-month peak.
New Zealand government bonds 0#NZTSY= XXX. (Editing by Kim Coghill)