Financial markets are now starting to price in the probability that the RBA will deliver not just one, but two further rate cuts by the end of 2016.
The chart below, supplied by Macquarie Research, reveals current market pricing in grey.
Macquarie, who correctly forecast that the RBA would cut interest rates earlier in the year, now see a further interest rate cut in August as “likely”.
The bank has also provided a “risk case” scenario, shown in red, that could see the RBA slash rates to just 1%.
“We have articulated a risk case that global disinflationary pressures, and further monetary policy easing, could drag the RBA cash rate down towards 1%,” say Macquarie.
“How the economy and AUD responds to the RBA’s (inflation) outlook shift and cut to 1.50% will be key to determining whether the RBA proceeds further, and when.”
Macquarie believes that persistent Australian dollar strength, seen as anything above US75 cents in the near to medium-term, could exacerbate the risk that more than one additional rate cut is delivered.