RBA to cut rates in June

As the Australian electorate found out last weekend, the concept of a “sure thing” can be a dangerous one. If there is such a thing as a “sure thing” in the world of financial markets and Central banks, it now appears highly likely that the Reserve Bank of Australia (RBA) will cut interest rates to 1.50% at its next meeting on June 4th.

At the close of business yesterday, interest rate markets had priced in 17basis points or approximately 69% of a rate cut at the June meeting. Following RBA Governor Philip Lowes speech to the Economic Society of Australia in Brisbane today, markets are now almost 90% priced for an interest rate cut next month.

In their recent communique, the RBA stated it would look through persistently low inflation and would only consider cutting interest rates should the labour market deteriorate. Evidence of that deterioration was firmly on display last week as firstly the employment index of the NAB business survey fell to its lowest level since 2015. Soon after, labour force data for April showed the unemployment rate rose to 5.2% from 4.9% in February.

The key sentence from today’s speech highlighting the RBA’s concern over the softening labour market and an imminent rate cut is “A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target. Given this assessment, at our meeting in two weeks' time, we will consider the case for lower interest rates.”

A June rate cut is likely to be a followed by another one before year, most likely in August or November which will take the RBA cash rate to just 1%. This is likely to result in the interest rates that banks offer on term deposits falling below 2%. In comparison, the 6.8% yield on a stock like Westpac should result in investor rotation into banks and other high yielding stocks. Elsewhere the AUDUSD is likely to continue lower and may even eventually become a funding currency, used to fund carry trades.

Source Tradingview. The figures stated are as of the 21st of May 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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