Market confidence is growing about a potential RBA rate cut

Julian Herbert/Getty Images
  • Since April last year the RBA has said the next move in its cash rate was likely to be higher.
  • Markets initially agreed with that view, but now they disagree, pricing the odds of a 25 basis point rate cut by November at around 50%.
  • Fixed income strategists at the Commonwealth Bank say pricing in further rate cuts from here are “aggressive”.
  • The RBA next meets on February 5. Before that event, a raft of important domestic economic data will be released, headlined by Q4 CPI in late January.

Since April last year policymakers at the Reserve Bank of Australia (RBA) have stated that the next move in Australia’s cash rate was likely to be up.

Initially, financial markets agreed with the bank, but now they disagree.

As seen in the chart below from the Commonwealth Bank, rather than thinking the next move will be an increase, they now see the most likely outcome as a cut.

Commonwealth Bank

The movements in the chart are based on market pricing of interbank futures.

Currently, futures markets believe a 25 basis point decrease in the cash rate is an even money bet by November this year, a significant deviation from what was seen throughout most of 2018 when a small probability was being attached to the next move being an increase.

Concerns about the outlook for both the global and domestic economy explain the change in view, mirroring the view of investors who sold down cyclical assets aggressively late last year.

While markets, collectively, still favour the prospects of a rate cut, from a domestic perspective, Philip Brown, Senior Fixed Income Strategist at the Commonwealth Bank, says the move to price in additional policy easing from the RBA is a little overdone.

“Given the current cash rate is already very low, pricing further rate cuts from here seems aggressive to us,” he says.

“Yes, the Q3 GDP data… was much lower than anticipated, but the economy is still near trend growth. Similarly, at 5.1% for November, the unemployment rate is up marginally from the 5.0% low of September.”

The RBA next meets on February 5.

Before that gathering, markets will receive a swathe of important data releases, headlined by Q4 CPI, retail sales and employment reports for December, and house price data for January from CoreLogic.

From a domestic perspective, they will go a long way to determining whether or not further monetary policy stimulus is warranted.

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