It might be slow in coming, but the market is starting to price in the possibility of lower official interest rates in the months ahead.
At this stage, there is about a 25 per cent chance of an interest rate cut by year end priced into the market which means there is still a long way to go for one, let alone the likely two or three, cuts that need to be delivered if Australia is ever to see 3 per cent GDP growth and unemployment anywhere near 5 per cent.
Reflecting this slow mood change, 3 year bond yields have fallen to 1.70 per cent, just 30 basis points from historical lows. The Australian dollar is losing friends to the point where it is clinging to 0.7375 and is seemingly vulnerable to a sharp decline.
Of course, the ones that need to change their view are the upper levels of the RBA. They seem to be strongly of the view that Sydney and Melbourne house prices are more important to the economy that the persistent missing of its inflation target, the near 750,000 people unemployed, the 1.1 million underemployed, the record low wages growth and what appears to be a troubling slide in commodity prices.
My view is that the RBA will cut at least three more times, to a low of 0.75 per cent, by around the middle of 2018. This will be needed to kick start growth and reinflate the economy. This will underscore a fall in the Aussie dollar – 0.6000 anyone?
It has been interesting to watch the debate from some commentators and economists move from demanding interest rate hikes just a few weeks ago, to now looking for steady rates. It will be more interesting to see who and when they join the current minority calling for rate cuts. Maybe after the RBA moves to a dovish bias next week and when the national accounts data show annual GDP sliding back below 2 per cent?