Summary:
On Thursday, Australia’s 10-year government bond yield fell 13 bps to around 4.27%, its lowest level in a month. It declined a further 9 bps on Friday to 4.18%, its lowest level in four months, as investors sought safe-haven assets.
On Tuesday, the RBA kept interest rates unchanged as expected. The board noted that core inflation was cooling as anticipated but emphasized the need for assurance that this trend would continue. The central bank also signalled a slightly dovish shift by removing references to caution on further easing. Governor Michele Bullock suggested the economy might be stronger than it appears, noting that there were no discussions about a May rate cut. While confidence in disinflation is growing, she reiterated the need for careful policy management without committing to future rate moves.
The RBA decision was dwarfed by the tariff announcement but there is a high degree of interaction. The broad expectation amongst economists, and indeed the market, is the Trump announcement will lead to a more dovish monetary policy stance in the near term from the RBA. The RBA could be more concerned about the indirect impacts to confidence, particularly ongoing uncertainty that affects global business investment and funding flows. The transmission channel for the RBA would be through potentially tighter financial conditions and less domestic business investment on the part of firms. The RBA would also potentially be on the lookout for lower household spending and higher precautionary savings.
Indeed, Traders have turbocharged bets for an interest rate cut next month on worries about a global economic recession. Money markets are fully priced for the Reserve Bank to reduce policy by a quarter of a point in May, taking the cash rate to 3.85 per cent. They had ascribed a chance of about 70 per cent before the announcement. Traders now expect a total of 90 basis points of easing over the next 12 months, equivalent to between three and four rate reductions. They had previously anticipated between two and three rate cuts. But this possibly be an overshoot but nevertheless the market is pricing a global recession risk.
By sheer coincidence, the RBA released its Financial Stability Review on Thursday. While the document was written prior to the tariff release, the RBA warns that US trade policies and nations’ responses could have a “chilling effect” on global business investment and household spending. But here’s the point – the actual tariff levels were higher than expected by the market and particularly hard on important Australian Asian export markets.
Bank Bill Swap Rates
| TERM TO MATURITY | CLOSING RATE | WEEK | MONTH |
|---|---|---|---|
| 1 month | 4.1 | 0.0075 | 0.0074 |
| 3 months | 4.1277 | 0.0168 | 0.0113 |
| 6 months | 4.299 | 0.031 | 0.087 |
SWAP RATES
| TERM TO MATURITY | CLOSING RATE | Δ WEEK | Δ MONTH |
|---|---|---|---|
| 1 year | 3.5136 | -0.2804 | -0.3044 |
| 3 years | 3.337 | -0.2985 | -0.368 |
| 5 years | 3.6657 | -0.2911 | -0.3143 |
| 10 years | 4.0865 | -0.218 | -0.2375 |
| 15 years | 4.289 | -0.2005 | -0.199 |