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Interest Rate Commentary

Following Britain’s recent decision to leave the European Union, we expect monetary easing to be on the agenda for most central banks. While countries such as the UK and Japan have already used most of there firepower, Australia still has room to move at the current cash rate of 1.75%. With the possibility of deflation already pressuring the RBA into further easing, the Brexit decision will only provide fuel to the fire and increase the probability of change at the board meeting next Tuesday.

 

The domestic yield curve is flat and overall yields across the curve are low compared to long term averages. In November 2015 there was a progressive increase in yield from ~2.60% to a high of 2.99%. But since this time the flight to quality meant the 10-year yield gave back the changes in Q4 2015 and more recently the Australian Government 10-Year Bond Yield has continued to drop to record lows (new low of 1.970% as at 23 June 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 1.46% last week. On the 24th of June 2016 the ASX 30 Day Interbank Cash Rate Futures June 2016 contract was trading at 98.33 indicating a 38% expectation of an interest rate decrease to 1.50% at the next RBA Board meeting (up from 19% last week).