Friday, March 30

A cut to the RBA target rate

Today we saw the third day when the one month overnight indexed swaps rate moved lower than the interbank rate (from RBA table f01).

Why is this happening? Well, it looks like the market is starting to anticipate a cut in the RBA target rate. To be fair, the market is not yet convinced about a rate cut, but in the last couple of days sentiment has moved a little towards believing a cut more likely than earlier thought. If I was to translate the prospect for a cut into probability terms, it looks like we are sitting at around a one third chance of a rate cut.

However, also to be fair, this growing spread is not a reliable predictor of whether or not the RBA will cut its target rate. Last month (and numerous times prior to that) the market anticipated in vain a cut to the target rate.

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