Interest rate decision: RBA to make a rate call amid sharemarket bloodbath

Australian home borrowers could be in line for super-sized rate cuts by Christmas after US recession fears wiped more than $150billion from the local share market in just two days.

The 30-day interbank futures market is now forecasting rate cuts in November and December – marking the first back-to-back rate cuts since the pandemic in early 2020.

The benchmark S&P/ASX200 index on Monday dropped 293.6 points, or 3.7 per cent, to 7,649.6 – its biggest single day fall since May 2020.

That amounted to a loss of 5.8 per cent – or $160 billion – for the local bourse over the past two days of trading, after it finished 2.1 per cent weaker on Friday.

The broader All Ordinaries dropped 311 points, or 3.81 per cent, to 7,859.4.

Not since March 2020, when markets were spooked by the outbreak of the COVID-19 pandemic, has the ASX experienced such a vicious two-day sell-off.

Financial markets have gone into meltdown amid fears the U.S. Federal Reserve will have to start cutting interest rates to ward off a recession in the world’s biggest economy. 

CommSec market analyst Steven Daghlian said a jump in the American jobless rate to 4.3 per cent, the highest level since October 2021, was spooking financial markets and dragging down the Australian Securities Exchange.

The American jobless rate is half a percentage point higher than it was in March, reminding traders of the Sahm rule theory that a recession is likely if unemployment increases by 0.5 percentage points in a year. 

‘Concerns about the U.S. economy – most of last week, there was data which was highlighting a slowing economy from jobs to manufacturing,’ he told Daily Mail Australia.  

The first Japanese interest rate rise in 17 years has also hit traders who had borrowed the yen to buy American tech stocks which saw payment app Block Inc, previously known as Square, plunge by 5.3 per cent on the New York Stock Exchange. 

‘There’s been attention on the carry trade in Japan with interest rates lifting,’ Mr Daghlian said. 

But amid the turmoil, Mr Daghlian said the Reserve Bank would be unlikely to cut interest rates on Tuesday, despite financial market concerns central banks around the world are too slow to ease monetary policy. 

‘It’s probably unlikely that they would do that because it probably would send out the wrong signal and would probably concern markets,’ Mr Daghlian said. 

‘I don’t think the Reserve Bank is going to make any rash decisions today and surprise markets in a significant way.’

The Australian share market on Monday plunged by 3.7 per cent, which saw more than $50billion wiped out in a day in the worst one-day in more than four years

The 30-day interbank futures market is now forecasting rate cuts in November and December – marking the first back-to-back rate cuts since the pandemic in 2020

‘This is the first RBA meeting in seven weeks as well – they don’t happen as often anymore.’ 

The Commonwealth Bank, Australia’s biggest home lender, is forecasting a rate cut in November but not December – with the RBA meeting in both those months with just eight meetings now held a year.

Two rate cuts in 2024, as the futures market is predicting, would take the Reserve Bank cash rate back to 3.85 per cent for the first time since June 2023.

Monthly repayments on an average $600,000 mortgage would fall by $197.

The futures market has also priced in five rate cuts by the end of 2025, which would take the cash rate back to 3.1 per cent for the first time since February 2023.

T. Rowe Price portfolio manager Scott Solomon said it was almost certain the Reserve Bank board will not raise the cash rate from an existing 12-year high of 4.35 per cent at its two-day August meeting.

‘Markets saw a nearly 50 per cent chance of a hike by the RBA before the end of the year get completely turned on its head, with markets now pricing nearly a 100 per cent chance of a cut before the year is out,’ he said.

The Australian Securities Exchange opened weaker again on Tuesday but the All Ordinaries index was only down by 0.24 per cent in early trade.