Big Banks Shift Odds of RBA Rate Cut

Heavy market bets by Australia’s major banks are influencing expectations of an interest rate cut by the Reserve Bank of Australia. These bets have pushed the probability of a cut up by more than 10%, but they may be distorting how financial markets price risk

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Pick & Scroll News
July 09, 2025

Heavy market bets by Australia’s major banks are influencing expectations of an interest rate cut by the Reserve Bank of Australia. These bets have pushed the probability of a cut up by more than 10%, but they may be distorting how financial markets price risk. The banks are employing aggressive trades to shield themselves from short-term losses, creating opportunities for hedge funds to profit by taking the opposite position.


Currently, the RBA’s cash rate remains at 3.85%. Many had anticipated a cut earlier in the week, especially following soft monthly inflation figures. However, the central bank surprised markets by holding the rate steady, going against the consensus among economists. These decisions have become more complex due to the way large banks are positioning themselves ahead of each RBA meeting.


Major banks such as Commonwealth Bank have been active in the overnight index swap market as they hedge against the risk of falling interest rates. These financial contracts can significantly influence expectations. Market pricing recently implied a 92% chance of a cut at the next meeting, yet analysts say this number is inflated. After adjusting for the banks' hedging behavior, the real chance is closer to 74%. A change of just three basis points can swing market sentiment in a major way.


This skewed activity opens a window for hedge funds betting against a cut. These funds have taken the opposite side and have earned returns up to eight times their initial investment when the RBA held the rate. While the banks aim to avoid losses due to previously locked-in deposit rates, their limited flexibility in responding to RBA decisions is driving much of this behavior.


The larger message is that market odds no longer reflect just economic data. Institutional hedging is reshaping those odds, making forecasts more challenging for traders, economists, households and mortgage holders planning for the future. With inflation remaining higher than expected and employment still below capacity, the RBA may choose to leave the rate unchanged for longer than markets currently believe.