Markets have reduced their expectation of a cash rate cut this year following key data at home and in the US suggests both economies were still on solid footing despite elevated inflation and decade-high borrowing costs. Now Australian money markets are no longer fully pricing in an interest rate cut this year, implying an 85 per cent probability of an easing, against 118 per cent on Tuesday.
Actually, in Australia, money markets are pricing in two to three rate cuts by early April and this dialling back came after the monthly consumer price index indicator for July, released on Wednesday, beat analysts’ forecasts by rising to 3.5 per cent, against 3.4 per cent expected. The outcome added to the case for the cash rate to stay on hold in coming months.
Then on Friday, data showed retail sales in July were unchanged, following a 0.5 per cent lift in June. While the reading missed forecasts of a gain of 0.3 per cent, it also came after two months of strong gains, potentially in anticipation of tax cuts which kicked off on July 1.
Overall, it seems we are caught in this higher for longer rate cycle much longer than many expected, and the expectation of cuts in the next few months are unlikely to eventuate, black swan event excepted. The likely inflation pulse from too much Government spending and badly targeted “support” suggests our inflation battle is far from being over, even as growth will come in weak on 4th September when the National Accounts are released to June 2024.
For households and businesses on the sharp end of all this, its bad news, but is should also question those in positions of power, as Governments, Central Bankers and perhaps even markets have lost the plot.
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