Interest Rate Commentary

Last week was a mixed bag in terms of economic data. As expected, the RBA left the cash rate unchanged at 1.50% but a few days later, Australia recorded negative economic growth for first time since the Global Financial Crisis. GDP figures for the September quarter showed that the economy contracted by -0.5% against a median estimate of -0.1% which means the annual GDP growth rate now stands at 1.8% (significantly less than RBA and Federal budget projections of ~3%). As a result, it is not surprising that the probability of a rate cut in the RBA’s next meeting has ticked up.

On the 9th of December, the ASX 30 Day Interbank Cash Rate Futures February 2017 contract was trading at 98.525 indicating a 13% expectation of an interest rate decrease to 1.25% at the next RBA Board meeting (up from 3% last week).

This week all eyes will be on the Federal Reserve when they meet for the last time this year. Given the steady US jobs report a few weeks ago and increased inflation expectations, the planets are now aligned and US futures markets are pricing in a 94% probability of a rate hike.