Last week, the Reserve Bank of Australia’s Board met for the last time this year and the statement released after the meeting was very similar to previous months. This was broadly expected given Governor Glenn Stevens and Assistant Governor Phil Lowe had both spoken over the past fortnight and provided little indication that the RBA’s reading of the economy had changed.
The two consistent themes of recent statements were retained, that is, “the most prudent course is likely to be a period of stability of interest rates”, and “the Australian dollar remains above most estimates of its fundamental value”. Commentary around the domestic economy was largely the same.
The Board did acknowledge the ‘significant declines in key commodity prices in recent months’, but any comments about the recent lift in business conditions and non-mining business investment were absent. This low point (in rates) has been in place now for sixteen months – a record for the modern policy era.
Following data releases over the last week, the futures market has shifted towards pricing in a better than 90% chance of another RBA rate cut (refer chart). Despite this, many do not believe the current pricing can be sustained unless communication from the RBA changes. With the RBA now in holiday-mode until February, markets will need to justify current levels. September 2015 overnight cash rate futures has 21 basis points of rate cuts priced in, while the implied yield of the 3-year bond future is 2.31% (19 basis points below cash).
There are now three prominent financial institutions calling the next move in rates as “down” following the latest weak economic data. Along with Deutsche Bank and Goldman Sachs, Westpac became the first of the four major banks to call a rate cut.
While all these houses now predict two rate cuts from the RBA, they differ on the timing, with Westpac calling in the first cut in February 2015 (and then in March), Goldman Sachs is calling the first in March 2015 (and then June), while Deutsche Bank don’t have the first cut until September 2015 (and then December).