Slowing economy fuels rate cut bets in Australia

“It’s an improvement on where it had been, but is still a long way from the 1 per cent productivity growth the RBA has been banking on” to help get inflation back to 2.5 per cent,” he said.

Bonds rallied on Wednesday. The three-year yield, which reflects interest rate expectations, fell to 3.9 per cent and the 10-year slipping to 4.3 per cent. Three-year futures jumped 7 basis point to 96.07 as markets scaled back expectations of a higher cash rate.

‘Danger zone’

Warren Hogan, chief economic adviser at Judo Bank, said the domestic economy was going through a soft landing.

“The RBA will be very comfortable taking two months off,” he said. Still, he cautioned that the economy could pick up if businesses did not pull back on hiring and investing.

“This is not an economy that’s slumping, and we still have some inflation pressure in the system,” he added, estimating a three-in-four chance of another rate increase in the first quarter of next year.

Bond futures imply less than a one-in-10 chance of a lift to 4.6 per cent when the RBA reconvenes on February 6.

Some investors, however, are concerned about the economic slowdown. Luke McMillan head of research at Ophir Asset Management, warned that it was “in the danger zone for a recession”.

No compelling case

In November, the RBA lifted the cash rate to 4.35 per cent, the 13th increase since last year. It has raised the benchmark by 4.25 percentage points to tame inflation, compared with at least 5 percentage points in most developed markets.

“If the RBA had its time again with its November hike, given today’s data, it might have sat on its hands,” said Mr McMillan.

Economists still doubt that the Reserve Bank would be contemplating cutting rates next year, unlike most central banks, which appear to be at the end of their tightening cycles.

“The key thing is the RBA is not easing rates soon,” Mr Hogan said, noting that his current rate cut call for November 2024 was under review and could be pushed out to early 2025.

Markets, however, have sharpened bets. They are fully priced for a rate cut by December 2024, from a 33 per cent probability just last week.

Services inflation

Mr Eslake is also sceptical, arguing the US and Europe were on solid ground to consider easing given their progress on inflation. “But it’s not nearly as compelling a case here. Our rates are lower than every other economy and inflation is higher than most,” he said.

“If the RBA hasn’t been as hawkish on the way up as other central banks have been, the corollary of that is that they’re not going to be as aggressive or as quick on the way down.”

Christian Baylis, co-founder at Fortlake Asset Management, estimated a 50 per cent chance of a rate hike next year because of the stickiness in services inflation. He has ruled out the prospect of a rate cut in 2024.

In the US, data showed that a cooling US labour market reinforced views that the Fed was done raising rates, sending bond yields lower globally.

Fed fund futures imply a 99 per cent chance the Fed will keep rates on hold at the 5.25 per cent to 5.5 per cent range at its policy meeting next week and have brought forward the timing of rate cuts. They imply a 69 per cent chance of the first drop as early as March.

Likewise in Europe, traders have ramped up bets the European Central Bank could deliver its first rate cut by March as inflation slows at a faster pace than most anticipated.