The US Federal Reserve's decision to delay cuts to its massive stimulus program is set to weigh on the Reserve Bank of Australia (RBA) and keep the door open for another interest rate cut, especially after the Australian Dollar soared to a three-month-high of USD0.9529 on the surprise move last week.
So when might the US Fed start the taper? Well, there are only two meetings left this year – October 29-30 and then December 17-18. The commencement of reduced asset purchases could start “possibly later this year”……a comment made at the July meeting of the US Federal Reserve. We still need to pencil in a tapering before year-end. Revelations over the weekend that the US Fed’s decision last week not to taper was a close call means that October is a “live meeting”.
Financial futures have boosted the probability of another RBA rate cut by February to 47%, from 35% last week. RBA Governor Glenn Stevens reiterated on 3 September that a lower currency was needed to drive growth in the economy as a decline in mining investment sends Australia toward its slowest expansion in 4 years.
An interesting chart I found last week (above) shows the expected cash rate by the end of December 2016 as priced by the interbank futures and overnight indexed swap markets. In summary, the market currently expects a cash rate of 3.75% to 4.00% by the end of 2016.;