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REPORT: The RBA Is Considering A Cut To The Official Cash Rate Next Week

Reserve Bank of Australia governor Glenn Stevens. Picture: Bloomberg

An article in Australia’s best-selling metropolitan newspaper claims the RBA has shifted its thinking on the economy and is likely to cut interest rates next week.

The article by veteran business reporter Terry McCrann contains detailed predictions on the changes in the RBA’s outlook and says “the Reserve Bank will almost certainly cut” following its board meeting next Tuesday.

The article was being shared in Australia’s investment banking community this evening and was posted on Twitter by trader David Scutt.

In summary, there are dramatic revisions coming to the RBA’s forecasts for inflation and economic growth which give significant scope for interest rate cuts this year.

Australia’s official interest rate has been at a record low 2.5% since August 2013, after which the RBA introduced a phrase – that a “period of stability” in interest rates was in the best interests of the economy – into its monthly statements.

It was included in the December statement but according to McCrann, that will now be dropped and most likely accompanied by a cut in the official cash rate to a new record low of 2.25%.

This is because the bank “will reveal it not only sees the prospect of Australia returning to trend growth pushed out to 2016 at best, but that growth will be sluggish through 2015.”

The RBA has a mandate to maintain inflation between 2% and 3% on average over the cycle. A major unknown in the market was how the RBA would see today’s inflation figures for Australia, in which the headline figures came in slightly below expectations, but underlying inflation was at 0.7% for the quarter and 2.2% annualised.

Now, it would appear, we have an answer. McCrann writes:

Arguably, that 0.7 per cent is either going to be shown as a “rogue number” in subsequent (downward) “adjustment” or as a “one-off”. Either way, that underlying inflation really is running close to a rate—enabling 2 per cent, even with some (inflation-boosting) impact from the lower Aussie.

McCrann adds that a “lot of things have changed since the RBA’s last meeting and rate statement in December. They are all are rate-cut positive”, referring to the collapse in oil prices, signs of disinflation in major economies, and emerging Eurozone uncertainty.

With disinflation now a major subject of conversation in global markets, the RBA will apparently make an inflation forecast with unprecedented detail on inflation. McCrann reports it “is likely to be 2.25 per cent, it could be as low as 2 per cent — either way, significantly, very significantly, below the 2.5 per cent midpoint of its 2-3 per cent target range.”

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