30days
free
Newsletter

Interest Rate Commentary

Last Tuesday, the minutes of the RBA July meeting revealed that inflation remains the major factor pertaining to further rate cuts. Price growth for the June quarter is scheduled to be released on the 27th of July (Wednesday) and may give the board the excuse it needs to cut the cash rate to a new low of 1.50%. The report is expected to show the underlying rate of inflation was around 0.4% which will amount to an annual rate of 1.4%. The RBA have forecasted 1.5% but expect inflation to remain low due to global disinflationary pressure. Consequently, if soft figures are released, it could clarify whether last quarter’s result was a one-off or if Australia has begun a downward inflation trend in line with other developed countries. If so, it is likely that rate cuts will be a common feature of economic policy in the months ahead.

 

Another contributing driver to interest rate policy is the Australian dollar. Due to its resilience, prior RBA rate cuts have had their effectiveness partially mitigated. This gives the RBA a strong argument (along with weak inflation) for cutting rates further to offset any potential rally in Australian currency. Given growing concerns overseas, the Australian dollar is seen as a safer alternative for global investors which is resulting in upward currency pressure to the RBA’s dismay.

 

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 1.864% as at 6 July 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% on the 26th of June 2016. On the 22nd of July 2016 the ASX 30 Day Interbank Cash Rate Futures June 2016 contract was trading at 98.415 indicating a 70% expectation of an interest rate decrease to 1.50% at the next RBA Board meeting (up from 60% last week).