Financial markets are now pricing in the possibility of an RBA rate cut next year

(Aaron P. Bernstein / Getty Images)
  • Financial markets are now starting to price in a small risk that the RBA may cut interest rates next year.
  • The move follows the release of a soft Australian GDP report this week, and one prominent market economist changing his forecast for further rate cuts.
  • RBA Deputy Governor Guy Debelle said the bank still believes the next move in the cash rate is likely to be higher, although he suggested there was a possibility this view could change should the economic outlook deteriorate.

It’s not just economists who are talking about the possibility of an RBA rate cut next year.

As seen in the chart below from the National Australia Bank (NAB), financial markets are now pricing in a small chance the cash rate may fall next year.

NAB

“Ongoing uncertainty and softer tones from the RBA recently has seen the market start to price in a small chance of the bank cutting rates next year,” says Tapas Strickland, Market Strategist at the NAB.

“The OIS [overnight index swap] market now prices a 16% chance of an RBA rate cut by August 2019, while further out the RBA is seen to be on hold throughout 2020.”

Almost all market economists currently see the next move in the RBA cash rate as being higher, albeit the the vast majority don’t see that occurring to 2020 at the earliest.

However, AMP Capital’s Shane Oliver broke with the consensus view earlier this week, forecasting the RBA will cut rates in the second half of next year.

In a speech delivered on Thursday, RBA Deputy Governor Guy Debelle maintained the view that the next move in the cash rate was still likely to be higher, although he added the caveat that the bank was still prepared to offer policy support when the need arises.

“The Reserve Bank has repeatedly said that our expectation is that the next move in monetary policy is more likely up than down, though it is some way off,” Debelle said.

“But should that turn out not to be the case, there is still scope for further reductions in the policy rate. It is the level of interest rates that matters and they can still move lower.”

Debelle said the bank could even borrow from the playbook used by other central banks in recent years.

“We have also been able to examine the experience of others with other tools of monetary policy and have learned from that. Hopefully, we won’t ever have to put that learning into practice,” he said.

“QE is a policy option in Australia, should it be required.”

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