Traders aren't giving up on another RBA rate cut just yet

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Australian rates traders aren’t yet willing to give up on the prospect of another rate cut being delivered from the Reserve Bank of Australia (RBA).

That fact is perfectly captured in the chart below from the Commonwealth Bank’s fixed income and rates strategy team, led by Adam Donaldson.

Source: CBA

It shows market pricing for the RBA cash rate over the next 18 months, looking at its evolution from May 9 — the day the ABS reported another weak retail sales report for March — all the way through to today.

As it reveals, despite the prospect of another 25 basis point being scaled back in recent weeks, collectively, they still are pricing in a small chance that another rate cut could be delivered, seemingly demonstrating a far more cautious outlook on the outlook for the economy than the RBA itself.

“In the absence of the proverbial ‘smoking gun’ for a rate cut from either the GDP or the RBA statement, the market has shifted a little higher,” said the CBA. “It’s hard for the market to retain rate cut pricing while the RBA is clearly biased not to cut rates further.”

While it’s not its core scenario, the CBA says that’s there’s nothing wrong with current market pricing, acknowledging that it sees “a clear risk that the RBA does cut rates eventually”.

However, with the RBA seemingly comfortable with policy as it currently stands, the CBA says that’s only likely to change should the bank see “clear evidence of a distinct weakening in the housing market”.

The CBA doesn’t see that happening, which, with things as they currently stand, should see the RBA leave interest rates on hold until at least 2019 in its opinion.

“While various tightening measures are in place, and supply is coming on stream, population and regional demand continue to provide solid underlying support to the market,” it says.

“We expect no change in the RBA rate until 2019.”

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