Australia’s September quarter consumer price (CPI) inflation report, released Wednesday, had an immediate impact once it hit screens, seeing interest rate markets scale back expectation of a further rate cut from the RBA this year.
At 4%, it’s now seen as next to no chance.
On that basis, you have a better chance of drawing a Melbourne Cup winner in the office sweep than seeing a rate cut, at least according to those betting on next Tuesday’s decision.
However, just because the likelihood of a near-term rate cut has diminished significantly — down from around 30% at the start of October — that doesn’t mean markets have entirely ruled out the prospect of a further rate cut in 2017.
Not by a long shot, as shown in this chart from ANZ interest rate strategists Martin Whetton and Katie Hill.
It tracks Australian overnight index swaps (OIS) pricing, essentially where markets think the RBA cash rate will sit in the future.
As it shows, expectations for the cash rate next year are lower, not higher, than where its currently sits at 1.5%.
While a 25 basis point rate cut is not fully priced in, markets currently put the probability of one arriving by August at around a one-in-three chance.
It’s also noticeable that there’s an increased probability of a rate cut priced in for February, May and August, underlining the importance of upcoming inflation readings given they fall immediately after the release of the ABS’ CPI reports.
According to Whetton and Hill, it’s premature to call an end to the RBA’s easing cycle which began in late 2011.
“The RBA’s Q3 print sat awkwardly for the market, with the first blush of headline inflation leaving investors pondering if the low has been set,” they say.
“However, underlying inflation was certainly soft and does not eliminate the possibility of a rate cut in 2017 if other sectors of the economy slow down.”
Alongside inflation, RBA governor Philip Lowe gave a pretty good indication on what he would be looking at earlier this month, making specific mention of housing and Australia’s labour market as two key components in monetary policy deliberations.