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Interest Rate Commentary

The Reserve Bank’s monthly board meeting is on Tuesday – the first under new Governor Philip Lowe – and is likely to be a key focus for investors in the coming week. While the Australian dollar remains strong, GDP growth is beating expectations, commodity prices have risen and overall economic data remains resilient despite decreased mining investment. As a result, markets are pricing almost no chance of a fresh cash rate cut from 1.50% to 1.25% and we expect market volatility to remain minimal following the meeting.

The domestic yield curve over the week flattened slightly but overall yields across the curve remain low compared to long term averages. In November 2015, there was a progressive increase in the Australian 10-Year bond yield from ~2.60% to a high of 2.99%. But since then, the flight to quality meant the 10-year yield gave back the changes in Q4 2015 and more recently has continued to drop to record lows (new low of 1.819% as at 2 August 2016). The 3-year bond has followed a similar pattern and broke out of its yield range (1.90 – 2.10%) in November / December 2015 reaching a high of 2.18%. It has since collapsed to reach a low of 1.373% on the 2 August 2016. On the 30th of September 2016 the ASX 30 Day Interbank Cash Rate Futures October 2016 contract was trading at 98.505 indicating a 2% expectation of an interest rate decrease to 1.25% at the next RBA Board meeting (down from 5% last week).