Australia’s money markets point to a 93 per cent chance of a rate cut

The money markets are rapidly backing the idea that the Reserve Bank will cut interest rates when they meet in a weeks’ time.

The money markets say there is a 93 per cent chance Aussies will start getting mortgage relief when the Reserve Bank of Australia meets in February.

Consensus from most leading economists is firm that the RBA will begin cutting rates in February, as the all important trimmed mean inflation heads towards its targets.

If they are right, Australia’s official cash rate will fall from 4.35 per cent to 4.1 per cent when the central bank meets between February 17 and 18.

AMP chief economist Shane Oliver said he was slightly less optimistic than the money markets.

The Australian money markets are now factoring in a 93 per cent chance the RBA cuts rates in February. Picture: NewsWire / Nicholas Eagar

“I think it is probably an 80 per cent chance,” Dr Oliver said.

“The reason I think they will cut is because the inflation figures have surprised on the downside for the trimmed mean and that is what the Reserve Bank has been after all this time.”

Dr Oliver is not alone in predicting a rate cut with all four major banks now saying there will be a cut in February.

Commonwealth Bank was the first to call this back in October but ANZ, Westpac and NAB also are all calling for a 25-basis-point cut at the February meeting, which would take the cash rate to 4.1 per cent.

For a borrower with a $1 million home loan today, one cut would save them $153 a month, while two cuts would save them $303, RateCity previously stated.

New buyers and those looking to refinance could also benefit from an increased borrowing rate should the RBA cut in February.

Dr Oliver said the RBA rarely cuts rates once and February could be the start of an easing cycle.

“The low Aussie dollar and the strong jobs market are an argument for gradual easing. So they might ease in February, pause in April and ease again in May, but I don’t think those things stop the RBA cutting rates earlier than previously expected,” he said.

The money market updated its prediction following the release of the December inflation print from the ABS.

If the RBA chooses to hold rates in February, it’s next chance to cut rates will be in April. Picture: NewsWire / Nicholas Eagar

According to the data from the ABS released on January 29, trimmed mean inflation came in at 0.5 per cent for the December quarter.

The yearly trimmed mean inflation rate fell to 3.2 per cent, down from 3.5 per cent in the September quarter.

This beats the Reserve Bank’s forecast for Australia’s trimmed mean inflation to come in at 3.4 per cent for the 12 months until December and 0.7 per cent for the final quarter of the year.

Headline inflation – which includes the more volatile parts of the CPI – rose by 0.2 per cent in the December quarter, to come in at 2.4 per cent for the 12 months until December 31.

Betashare’s chief economist David Bassanese said “cut, baby, cut!” in response to the news on the trimmed mean inflation.

“There’s now a good chance trimmed mean underlying inflation could fall back to with the RBA’s 2-3 per cent inflation target band by June, rather than the RBA’s current expectation of December,” he said.

“As a result – and despite still solid employment growth – there’s no question the economy deserves an interest-rate cut to ease the restrictiveness of current policy settings.”

If the central bank does not move on rates in February its next opportunity will be March 31 to April 1 or May 19-20.

The RBA board will be meeting eight times this year with the two-day meetings concluding with a policy announcement at 2.30pm.

Originally published as Australia’s money markets point to a 93 per cent chance of a rate cut