With Australian economic growth slowing sharply in the second half of last year, and despite unemployment remaining near the the lowest level in eight years at 5%, financial markets now expect the RBA to cut official interest rates in the months ahead.
According to Australian interbank futures, a 25 basis point reduction to the cash rate in May, taking it to just 1.25%, is now seen at around 60%.
By July, a 25 basis point reduction is now fully priced in.
Beyond the near-term, a further 25 basis point reduction to the cash rate is expected by February next year, with a small chance of a third reduction seen by the middle of 2020.
Australia’s cash rate has remained at 1.5% since August 2016.
In the year to March, underlying inflation rose by just 1.42%, the equal-lowest pace on record.
The annual rate is now moving further away from the RBA’s 2-3% inflation target, helping to explain why financial markets expect the bank to take action to prevent disinflationary forces from becoming outright deflation.
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