30days
free
Newsletter

Interest Rate Commentary

On Wednesday inflation data will be released for the September quarter. The previous quarter’s release was a key input in the RBA’s decision to cut the cash rate from 1.75% to 1.50% in August and we expect this week’s release will hold similar weight. While commodity prices will offer some relief to the overall figures, the RBA generally focuses on core inflation (which strips out volatile items including commodities). The RBA targets core inflation of between 2.0% – 3.0% but this metric only came in at 1.57% annualised in June. If a similar weak figure prints on Wednesday, the RBA may have no choice but cut the cash rate to a fresh low of 1.25% next month.

Although the 10-Year Australian Government Bond Yield rose slightly (from 2.24% to 2.265%), we witnessed a small retracement in bond yields across the curve as the selloff in the long end of the curve (10+ year) abated.

However, 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 21st of October 2016 the ASX 30 Day Interbank Cash Rate Futures November 2016 contract was trading at 98.540 indicating a 16% expectation of an interest rate decrease to 1.25% at the next RBA Board meeting (up from 14% last week).