Focus on RBA as betting firms for rate cut

Credit markets have all but priced in a cut in official cash rates today by the Reserve Bank.

The RBA will hand down its decision at 2.30pm today.

Credit markets have all but priced in a cut in official cash rates today by the Reserve Bank, as the ­nation’s central bank looks to spark growth in the face of a slowing economy.

Interest rate futures have priced in an implied 75 per cent probability of a rate cut when the RBA board meets this afternoon. This is up from 67.5 per cent a week ago, according to Bloomberg data.

However, the central bank has already surprised economists twice this year, by cutting the cash rate in February for the first time since August 2013, and again by leaving it on hold in March.

Since leaving the cash rate untouched at 2.25 per cent last month, the price of iron ore has slumped a further 18 per cent, diving through the $US50-a-tonne mark to its lowest in six years.

Meanwhile, the RBA board will also have to consider Sydney’s soaring property prices, which have shot up almost 14 per cent year-on-year and show no signs of slowing.

Because surging house prices in Sydney are an isolated concern they won’t be enough to stop a rate cut for now, according to AMP chief economist Shane Oliver, who sees the iron ore price fall as a more pressing concern.

“The strong Sydney property market remains an argument against the RBA cutting interest rates again,” Dr Oliver said.

“Despite the pick-up in dwelling construction the outlook for economic growth remains sub-par and the 18 per cent fall in the iron ore price since its last meeting is adding urgency for the RBA to ease again.”

A cut to 2 per cent will take Australian mortgage rates to their lowest since the late 1960s.

Another factor likely to weigh on the RBA is recent weakness in the US dollar, amid signs the recovery there may have stalled.

US jobs figures, released Friday, estimated that payrolls rose by 126,000 — just over half the number Wall Street economists were expecting. It’s now expected that US GDP growth is likely to be well below the previous quarter.

After six months of powerful gains that saw the US dollar rise over 15 per cent against a trade weighted index, the greenback has now stalled, slipping 2.4 per cent since March 13.

It has been a goal of the RBA to lower the Australian dollar, but a weaker US dollar could see the local currency push higher.

JPMorgan expects the RBA to wait until May before easing rates, saying a cut today would have “shock value” but waiting would give a clearer view of the economy, including inflation figures.

“Waiting allows officials to see the next quarterly CPI data at the end of this month and, of course, to digest another full round of the monthly dataflow, including the March employment report, released the week after next,” chief economist Stephen Walters said.

“Moreover, it’s not clear to us how easing policy would be consistent with officials having left the cash rate steady back in March. Policy by mood swing is never a good look.”