Australian Interest Rates – The Next Move

A number of commentators are pointing to Australian five year bond rates as an indicator of an impending rate cut. This is an oversimplification. In the main, bond markets are

driven by inflation expectations. Lower bond yields suggest that bond traders believe the RBA has inflation under control.

However, looking at the relevant instrument (30 Day Interbank Cash Rate futures) the market IS pricing a rate cut.  The table below shows the futures market for each of the months to December this year, and the equivalent interest rate for that 30 day period:

Looking at the rates implied by the futures prices, it is clear that markets expect interbank rates to fall, possibly as early as August. The yields from September to December suggest that a rate cut by then is more likely than not.

This is at odds with the RBA’s tightening bias. The RBA’s target range for long run inflation is to keep it between 2% and 3% “in the medium term”. The last reading (Q1) on headline inflation was at 3.3%, although the RBA looks at “core inflation”, last estimated at 2.8%.  This explains the RBA’s bias, and suggests that the market is looking for a trend change in inflation, from up to down, when the Q2 inflation reading is released in July.

About michaelmccarthycmc

Chief Market Strategist - CMC Markets and Stockbroking Regular on ABC, BBC, Bloomberg, Channel TEN, CNBC, SBS and SKY
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2 Responses to Australian Interest Rates – The Next Move

  1. Stephen says:

    I think the RBA needs to do something about the high AUD. I think a 25 basis point cut in August would invigorate the Australian retail sector long enough to give everyone a boost in sentiment. Greetings from the days of County Natwest.

    • michaelmccarthycmc says:

      Thanks Stephen – I suspect the RBA thinks the AUD will correct of its own accord – it has been a spectacular move up.

      Aaah – County – we didn’t know how good we had it!

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