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Weekly Economic Commentary

Weekly Economic Commentary

Categories: General, Commodities

Just over two months ago in late April, before the Federal Budget was released, market pricing pointed to a 75% probability of a rate hike by mid 2015 and a near 100% probability of two rate hikes by year's end. Now markets are pricing in a 50% probability of a rate cut by early 2015 and a zero probability of a rate hike by end 2015 (refer chart below).

Graph

While there may be an argument to price some chance of a cut given the recent mixed economic data and the strong Australian Dollar, which is pushing the sentiment at the moment, the current in excess of 50% probability of a rate cut by year’s end has a very pessimistic view on the economic outlook and seems a bit rich to me.

The hurdle for further rate cuts by the RBA therefore remains high, although there are still a number of risks to the economic outlook which could trigger further policy easing or push out the timing of the first rate hike. The most important of these and the ones closely watched will be the next few readings of consumer confidence and employment, as well as the level of the Australian Dollar.

The trend in employment growth has “stalled” from the strong pace earlier this year despite posting a rise of 15,900 in the number employed last week, with the unemployment rate ticking back up to 6% after a dip down to 5.80% last March. Given the RBA’s expectation of a higher unemployment rate (to around 6.25%) I see no reason for them to contemplate a rate cut unless the unemployment rate spikes a lot higher than this.

Source: Rural Bank

 

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