Markets still think it's a certainty the RBA will cut rates

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Australia’s June quarter consumer price inflation report, released Wednesday, has certainly created an impact when it come to the outlook for domestic interest rates.

From a two-in-three chance before the CPI report was released, traders now deem the likelihood of a 25 basis point rate cut from the Reserve Bank of Australia (RBA) in August as a 50-50 bet.

Come 2.30pm next Tuesday in Sydney, the RBA rates decision looks set to be a show-stopper.

However, while rates markets are now evenly split as to whether or not a near-term rate cut will arrive, the same certainly can’t be said looking further ahead.

As this excellent chart, supplied by TD Securities, shows below, markets not only expect one further rate cut to arrive — taking the cash rate to a fresh record-low of 1.5% — but they continue to speculate that there’ll be another cut after that.

Yes. Not one but two cuts, as reflected by the scale on the chart pricing that has the odds of an additional 25 basis point rate cut well over 100%.

The market’s expectations regarding RBA easing have been trimmed but are little changed following the CPI print. We are a little surprised at this,” said Prashant Newnaha, a stragetist at TD.

While he admits that the small upside beat in the core inflation rate “was not significant”, Newnaha, mirroring the markets, is unsure as to whether it will trigger a rate cut in August.

“Considering the RBA displayed no urgency to cut in May, and given the magnitude of the Q1 CPI miss then, surely the RBA’s decision on rates is a lot easier this time with the CPI outcome as per its own expectations,” he says.

“Indeed the minutes from the July meeting make it clear that there has been little data on the Australian economy since the last meeting. With inflation really the last piece of the jigsaw puzzle, and that piece coming in at expectations, this suggests the RBA keeps the cash rate on hold at 1.75% next week.”

While TD now has the RBA on hold in August, the group forecasts that the bank will still cut rates, only three months later, in November.

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