Markets are pricing a more than 50 per cent chance that the Reserve Bank of Australia will cut interest rates at its June meeting but economists are sceptical.

Brown Brothers Harriman strategist Win Thin said after the jobs data that he does not expect negative rates but that “it is worth noting that world interest rate probability suggests 50 per cent odds that the RBA cuts rates to zero.”
Financial markets are likely hoping that the RBA will provide more support for the economy after it embarked on a program of bond buying and committed to holding interest rates at 0.25 per cent in March.
The RBA highlighted that 0.25 per cent interest rates were effectively in line with the US, the UK, and New Zealand. “Each of us are using all the scope we have with interest rates to support our economies through a very challenging period,” said Dr Lowe.
The Reserve Bank of New Zealand last week broke ranks and outlined a plan to potentially take the New Zealand cash rate into negative territory as the economy stutters under the weight of pandemic-related shutdowns.
“The committee discussed the balance of risks around the baseline scenario and agreed that the risks are to the downside. Activity could be lower than expected as a result of containment measures having more severe economic effects than assumed,” the RBNZ’s rate-setting board said.
“Another risk is that the pandemic itself lasts longer or has more severe effects on trading-partner economies than assumed. There is also uncertainty about the impact of monetary policy actions on the economy.”
If the RBNZ does turn to negative rates that would put further pressure on bond yields and depress the currency, said Prashant Newnaha at TD Securities. NZ 10-year government bonds were trading at 0.61 per cent and the currency was at US59.35¢.
Dangers of extrapolation
There are dangers for rate markets in extrapolating from New Zealand to Australia. Shane Oliver, the chief economist at AMP Capital, pointed out that RBNZ governor Adrian Orr “expressed an openness to negative rates” late last year around the same time Dr Lowe was dismissing them for Australia.
“New Zealands lockdown was more severe than Australias and so the hit to the economy was greater, so they need more desperate measures,” he said. Australia’s economy is now starting to reopen, with restaurants, pubs and cafes welcoming back customers over the weekend.
“Like the Fed, the RBA cant see much benefit from the negative rates experience in Europe and Japan,” Dr Oliver said.
Pricing of future negative rates is not confined to Australia. Markets started to price in negative US interest rates within months as investors asked for more from the central bank of the world’s largest economy.
Last week, Federal Reserve chairman Jerome Powell shot down talk of turning to negative interest rates to address a downturn “significantly worse than any recession since World War II”.
Mr Powell said he and his colleagues made their opposition to negative rates clear in October. “The committee’s view on negative rates has not changed,” he said. “This is not something we’re looking at.”
“While the Fed has so far not endorsed this as a policy measure, the market is making it an issue,” said Mr Newnaha. “Even the Bank of England deputy governor could not rule out a move towards negative interest rates.”
The minutes of the RBA’s latest interest rate meeting will be released on Tuesday and Dr Lowe will speak later this week.