Financial markets are losing faith in RBA rate hikes

Robert Cianflone/Getty Images)Oh, you gotta keep the faith.

It’s been nearly two years since the Reserve Bank of Australia (RBA) last moved official interest rates.

And when you’re talking about rate hikes, you have to go back nearly eight years ago.

As seen in the chart below from Westpac, financial markets are quickly losing faith that the RBA will lift its cash rate at all over the next 18 months.

Westpac Bank

Back at the beginning of the year, overnight index swaps (OIS) were pricing in nearly two 25 basis point rate hikes by May 2019. Now they’re only pricing in one 25 basis point increase by November 2019.

Like many economists, traders have been constantly scaling back their expectations for both the timing and scale of RBA rate hikes in the year ahead.

Elevated levels of labour market slack, contributing to weak wage and inflationary outcomes, is one reason why he shift in sentiment is occurring.

More recently, falling property prices in Sydney and Melbourne, as well as elevated short-term money market interest rates, have also contributed to pessimism over the likelihood of rate hikes.

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