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Aussie Bonds Bet on Early RBA Cut After Job Data, AUD Falls

Aussie unemployment rise to 4.1% fuels speculation of an imminent RBA rate cut, shifting market expectations.

By Barry Stearns

5/15, 21:40 EDT

Key Takeaway

  • Australia's unemployment rate rise to 4.1% triggers market bets on an RBA rate cut before year-end, weakening AUD/USD.
  • Revised budget forecasts and a total of 425 basis points in RBA rate hikes since May 2022 adjust expectations for earlier cuts by mid-2025.
  • Government's shift to a A$28.3 billion deficit by 2025 and inflation-targeting measures may prolong high interest rates despite fiscal efforts to curb inflation.

Unemployment Rate Sparks Rate Cut Speculation

Australia's unemployment rate has seen a notable increase to 4.1%, with the job gains for the month being predominantly in the part-time sector. This development has led to a significant shift in market expectations, with rate traders now pricing in a near certainty of a Reserve Bank of Australia (RBA) rate cut before the end of the year. The Australian dollar (AUD/USD) has also reacted to this outlook, losing some ground as a result. Garfield Reynolds, a market analyst, highlighted the impact of the jobs data on market sentiment and future rate expectations.

Budget Forecasts and Monetary Policy Adjustments

The Australian government's latest budget announcement has prompted a reevaluation of the RBA's monetary policy timeline. With wider deficits forecasted in the coming years, market participants are adjusting their expectations towards potential RBA rate cuts in the first half of 2025. This shift is evident in the Overnight Index Swap (OIS) contracts, where the likelihood of a rate hike in June or August has decreased significantly. The budget includes measures such as a A$300 ($200) per household rebate on power bills to tackle inflation and support economic growth, aiming to bring inflation within the RBA's target range of 2-3% before 2025. However, the aggressive rate hikes by the RBA, totaling 425 basis points since May 2022, have brought interest rates to a 12-year high, underscoring the central bank's efforts to stabilize the economy.

Fiscal Policy's Influence on Inflation and Rates

The center-left Labor government's budget outlines a shift from a surplus to a deficit of A$28.3 billion by 2025, a move that could complicate the RBA's inflation control efforts. The introduction of energy rebates and rent assistance is expected to reduce inflation but may also prompt the RBA to maintain higher interest rates for a longer period. Economists are concerned that the government's cost-of-living assistance might fuel further inflation by increasing consumer spending. This fiscal expansion and its potential impact on inflation and monetary policy have sparked debate among economists and market participants.