Bets shift towards rate cut

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Following the market turmoil, the interest rate swaps market is now firming towards an interest rate cut at the RBA’s November meeting. From The AFR:

US investment bank Citi on Tuesday reported a surge in bets on a third cut for the year, with interest rate swap markets now showing a 76 per cent chance of a 19 basis point reduction at the November board meeting of the RBA.

This compares with a 48 per cent chance of a 12-point cut when measured on Friday morning, and a 64 per cent chance of a 16-point cut before the Australian stock market opened on Monday.

A separate index prepared by Credit Suisse has the chance of a 25 basis point cut at the RBA’s next board meeting, in September, at 37 per cent, up from 21 per cent before jitters began to take hold late last Friday and less than 20 per cent for most of last week.

Whether the RBA will cut in November is a moot point. What MB is confident about is that the next move in official interest rates, whenever that is, will be down.

Why? Because commodity prices and the terms-of-trade will continue to slide, placing downward pressure on national income. Capex will fall sharply over the next two years. Dwelling construction will soon enough turn south, along with prices. And the car industry will commence shutting down next year.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.