While the Reserve Bank of Australia (RBA) Board met last week (with no change in rates again) the main focus for markets was on a speech by RBA Governor Glenn Stevens last Thursday. Mr Stevens confirmed that interest rate hikes are some time away, the Australian Dollar remains uncomfortably high and that the market was too complacent about a potential fall in the exchange rate.
The Governor did not seem uncomfortable with the market’s current pricing, which led most analysts to continue to expect the RBA to keep the cash rate on hold until 2015, with the risks tilted towards the tightening cycle commencing later rather than sooner. The RBA also continues to prefer a lower exchange rate to even lower interest rates.
Surprisingly however, financial market futures have increased the probability of a rate cut before Christmas to almost 40% (from 10% a week earlier) electing to focus on the Governor’s comments that the Aussie remains “overvalued, and not by just a few cents” which seems to have done enough to plant doubt among the speculators that rates could be cut in the future….which I believe is a big call.