The recent selloff in risk assets, built upon renewed fears of a China-led global slowdown, has seen expectations for further rate cuts in Australia grow substantially in recent weeks.
The chart below, from CBA interest rate strategist Jarrod Kerr, reveals the shift in interest rate expectations seen over the past year.
Based on current 30-day RBA cash rate futures pricing shown in blue, markets now attach close to 50-50 probability that the RBA will cut rates twice, not once, in the year ahead.
This is a sharp increase on just a month ago where markets put the probability of one rate cut at just over 50%.
Multiple rate cuts, at least in the minds of investors, are back on the table courtesy of recent ructions in financial markets.
This mindset differs greatly to that of the economic community with the vast majority still favouring that the cash rate will remain unchanged, or increase, over the course of 2016.
In a recent survey of 23 economists conducted by Bloomberg, only 10 have the cash rate being below 2% by the end of the year. 10 have the cash rate remaining at 2% while 3 are predicting that there will be rate increases, not cuts.
It’s all a bit confusing. One group is saying one thing, another group the other.
However, if there’s one thing that both groups learned in 2015, it’s that the RBA can and will make changes to rates should they deem them necessary, regardless of expectations.
By May last year they had cut interest rates twice, bamboozling the vast majority of economists and traders who were favouring stable rates, or one reduction, over the course of 2015.
Just because markets are now talking about two rate cuts, and economists none, doesn’t mean that either will end up being right.