Markets factor out rate hike after RBA meeting, but first cut still a year away

Feeling a little queasy about the interest rate outlook? You’re not alone.

For the last 3 months it’s been a steady build up of worse than expected data on inflation, and as a result, a ratcheting higher of market pricing for another RBA rate hike. Even though pricing of another 25-basis point hike never tipped 50%, the timing of the first cut – vital for so many mortgage holders – has been pushed further into the distant future.

Until today! Finally, some relief on both fronts.

At yesterday’s RBA meeting, the Reserve Bank Board decided to keep interest rates on hold at 4.35%. That’s not the good bit.

In their regular post-meeting statement, their language took a sharp tilt towards interest rates remaining higher for longer, noting diminished confidence that Australian inflation is under control. Er, that’s not the good bit either – actually, it’s quite bad.

Ok, get to the good bit, Carl.

In her presser after the meeting, RBA Governor Michelle Bullock went to great pains to remind us that RBA monetary policy is already restrictive – she said it a few times. Speaking on behalf of the Board, Bullock noted: “we don't think we necessarily have to tighten again”.

Hey, she also said: “But we can't rule it out. If we have to, we will." But we already knew that bit. You see – Governor Bullock has to say stuff like that so that our “inflation expectations remain anchored”. This is also a point she made explicitly clear a few times.

It’s important that the RBA keeps talking tough on inflation so we believe them when they say they will do something about it.

So, in summary, given the RBA still feels what they’ve already done is fighting inflation, tightening monetary conditions even further is likely not necessary for now.

Market response – where are rates expected to be now?

Here’s how the market responded. First, note where we were at the height of rate hike fears just last week, 1 May. Markets had priced a 40% chance of a 25-basis point hike and pushed the first 25 basis point cut out past the look-forward period ending in October 2025.

ASX 30 Day Interbank Cash Rate Futures Implied Yield Curve, 1 May 2024. Source: ASX

After the RBA meeting, the Cash Rate Implied Yield Curve has generally moderated, flattening to sit no higher than 4.35% – the current cash rate, and unlike 1 May, it dips below the all important 4.10% level in June 2025.

ASX 30 Day Interbank Cash Rate Futures Implied Yield Curve, 7 May 2024. Source: ASX

This means that the market has priced in a 100% chance of the first 0.25% cut by then. The yield curve ends at 3.94% in October 2025 which implies a 64% probability of a second 0.25% cut by that month.

So, not only has a rate hike been fully priced out (phew!), the first cut is now expected in around 12 months, and there’s a good chance of a second not long after.

But, hey, we can see how quickly market expectations swing on both the data – and as few as 11 words from a central banker. So, as good as this news is that I bring you, the outlook for inflation and interest rates remains murky at best.

Which is exactly why we’re here – to bring you the latest news and analysis you need to make informed decisions about your money!