National Australia Bank predicts that the Reserve Bank of Australia (RBA) will lower interest rates in November, with another cut likely in February. This could bring the cash rate down to 3.1% by early 2026. The process of cutting rates will be gradual, helping policymakers keep inflation in check and avoid placing too much stress on the economy. Key factors influencing this prediction include easing inflation, a weakening job market, and slow economic growth.

Potential Risks and Influences

There are risks that could affect this outlook in both ways. If wage growth remains strong or inflation in the services sector continues, it could delay the RBA’s plans. On the other hand, weak global demand or more trade disruptions could speed up the rate cuts. The market is currently preparing for a rate cut in November, followed by another one early next year. It seems likely that the cash rate will approach 3.1% by February 2026, suggesting a gradual easing from the central bank. This outlook is strengthening due to recent data. The latest quarterly Consumer Price Index (CPI) showed inflation at 3.1%, indicating it is moving closer to the RBA’s target. At the same time, the unemployment rate increased to 4.3% in August, suggesting the job market is softening. For traders, this means considering long positions in interest rate futures for the upcoming meetings. Three-year government bond futures are also appealing, as prices will likely rise when yields drop due to expected cuts. This is a key strategy for positioning for the anticipated easing.

Strategies and Market Implications

We should also keep an eye on the yield curve, which may steepen. Short-term rates are expected to decline more than long-term rates as cuts happen. This indicates potential trades that could benefit from the widening gap between two-year and ten-year bond yields. Looking back at the easing cycle that started in mid-2019, front-end yields changed well ahead of actual RBA decisions. History shows that the market will likely price in these cuts in the coming weeks, rather than on the day of the announcement. This means it’s important to act now instead of waiting for the RBA’s official word. However, ongoing inflation in the services sector poses a risk. To manage this risk, we can consider using options, such as buying inexpensive, out-of-the-money calls on interest rate futures. This would offer protection if the RBA has to postpone cuts because of ongoing inflation pressures. A dovish shift from the RBA is also likely to impact the Australian dollar negatively. We expect the AUD/USD pair may fall as the interest rate gap with the US narrows. Therefore, purchasing AUD/USD put options could be an effective way to speculate on or protect against potential currency weakness. Create your live VT Markets account and start trading now.

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