The government bond and swap yield curves remain as flat as pancakes as the interest rate futures markets push out any expectation of a rate rise in coming years. This was echoed by Governor Stevens during the week when he said in a speech at the Economics Council “…we expect rates to remain lower for longer”. However, we do think the RBA will adjust the target cash rate down at some point in the near future. Their primary concern is an overinflated currency which is not reacting to changes in the terms of trade. In turn, this is a direct result of external economies (as in the US, Japan and Europe) continuing with zero interest rate policies and /or quantitative easing. From a policy perspective this puts the RBA in a tough position as it can either lower rates, which will inflame an already hot housing market, or it can intervene in the currency market. If anything, we would expect the latter but even this we consider to be only a small possibility. The reality is 2.5% is an appropriate setting for the current economy and the yield curve is telling us that things are unlikely to change in the short term. This is another reason why we are cautious of taking any long duration positions in the current environment.