In a recent poll, 31 out of 37 economists expect the Reserve Bank of Australia (RBA) to cut its cash rate by 25 basis points next week, on July 8. Six economists believe there will be no change. The forecasts indicate a median cash rate of 3.10% by the end of 2025, which is a decrease from 3.35% predicted in May. If the cut happens, it will be the third reduction this year. Predictions suggest there could be four or even five total rate cuts in 2023. This comes amid easing inflation and a slowing economy. The RBA will announce its decision at 2:30 PM local time on Tuesday, July 8, followed by a news conference with Governor Bullock an hour later. A clearer pattern in monetary policy is starting to emerge. The RBA already lowered the cash rate twice earlier this year and is widely expected to make a third cut next week. Lower inflation and a slower economy are now significant factors that have influenced market expectations. The poll results show a strong consensus, with most economists predicting a 25-basis-point cut. Those who think there will be no change may be more focused on short-term fluctuations than long-term trends. The median prediction for next year’s cash rate has dropped to 3.10%, indicating that market sentiment is adjusting more quickly than expected, and policy is likely to remain supportive for a while. Economists like Williams recognize that inflation is gradually improving. There has been a noticeable, albeit gradual, decline in prices. Wage growth isn’t rising as significantly as it did last year, creating a natural path for rate cuts as long as the current trends continue. The focus is on broader changes over the next few quarters rather than reacting to individual data points. Financial markets, including futures and swaps, are already reflecting this expectation. Forward curves have shifted lower since late May. If the RBA doesn’t make the expected cut, it would suggest that something unexpected has strengthened conditions recently, which seems unlikely given the current data. Many fixed income desks have already adjusted their short-term contracts in anticipation of further cuts in the latter half of the year. Governor Bullock’s press conference will undoubtedly provide more details. Based on her previous statements, we expect her to emphasize the importance of managing inflation while minimizing disruption to employment. She has often highlighted the need to balance risks, especially since the housing market is sensitive to interest rates—a trend that is still relevant, although slightly less urgent than earlier this year. For those involved in trading rate derivatives, it’s crucial to position themselves wisely amid these developments. Fixed receivers may want to increase their exposure due to the overall dovish policy outlook. However, they should also manage their risks ahead of Tuesday, as any indication of a pause or slower pace may widen rate spreads, particularly in the volatile short-term market. We have adopted a flexible approach within the shorter curve structures, adjusting our strategies to capture moderate easing while avoiding the increasingly unlikely scenario of six or more cuts. Pay careful attention to the second part of Tuesday’s announcement: the press conference. While the written decision will outline the policy change, the tone during the Q&A could reveal whether future cuts will be gradual or if pauses may occur based on new data. Recent labor market figures have provided enough leeway that an immediate change seems unnecessary, but market conditions can shift unpredictably. Continuously reassess the term structure each week. Although carry advantages and rolldown benefits remain, the steeper parts of the curve have flattened, leading to narrower entry points over time. Traders dealing in options may notice tighter premiums around at-the-money strikes as we approach July’s meeting. Any increase in implied volatility after the announcement could create short opportunities for restructuring. In these moments, details of duration, convexity exposure, and broker skew become crucial. Monitor how the market responds not just at 2:30 but throughout the Asian and European sessions that follow. If the message is clear, it should provide valuable direction—our task is to stay ahead of it.

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