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Bond traders speculate on rate hike

Bond traders displayed increased confidence on Monday, suggesting that the Reserve Bank of Australia (RBA) might be approaching the end of its aggressive cycle of interest rate increases. As yields dipped, the three-year bond rate reached 3.86 per cent, 24 basis points below the current cash rate of 4.1 per cent. This indicates that the market is no longer entirely convinced about the possibility of another rate increase.

However, economists and the market hold differing views on the RBA’s next move regarding interest rates. So far, the central bank has already added 4 percentage points to rates since May of last year. Interbank futures ascribe a 29 per cent chance of a rate increase at the RBA’s August policy meeting following the central bank’s decision to hold the cash rate steady earlier this month. This compares to a 54 per cent chance before last week’s inflation data, which turned out softer than expected in the June quarter.

In a Refinitiv survey, 20 out of 36 respondents forecasted that the central bank would raise rates for the 13th time during this cycle. Outgoing chief economist of Westpac, Bill Evans, predicted a 25-basis-point move on Tuesday, although the market currently perceives it as an unlikely outcome.

Mr Evans stated that the market’s view is based primarily on the quarterly headline Consumer Price Index (CPI) data, but there are more factors to consider. He believes RBA governor Philip Lowe may not be ready to declare victory based solely on one quarter of data, and that there may be more room for further rate increases.

HSBC’s chief economist in Australia, Paul Bloxham, also leans towards another rate hike, as he sees reasons both for a pause and for raising rates. He believes that inflation could still present an upside risk, leading to further rate hikes by the central bank.

Fund manager Angus Coote, co-founder of Jamieson Coote Bonds, remarked that both the market and economists are attempting to gauge where interest rates will peak in this cycle. He noted that while the outcome remains uncertain, the bond market is eagerly observing developments, as it is evident that the central bank is nearing its peak in rate increases.

Westpac’s Mr Evans highlighted that the current rate cycle has been markedly different from previous ones, with traders failing to consistently predict the RBA’s decisions over the last year. The central bank has surprised the market on several occasions, making it more challenging to anticipate its actions accurately.

As the RBA’s crucial monetary policy meeting approaches, all eyes are on the decision-makers as they weigh various economic indicators and inflation trends to determine the future trajectory of interest rates in Australia.