A budget-day RBA rate cut is suddenly a real chance

Photo: Stefan Postles/ Getty.

Markets have just dramatically revised higher the chances of the RBA cutting interest rates next Tuesday following disappointing inflation data from the Australian Bureau of Statistics.

Cash rate futures are now pricing a 50/50 chance of a 25 basis point cut to the official cash rate, which would bring it to an historic low of 1.75%. Before the CPI data was released this morning, markets were pricing in a 13% chance of a cut on budget day.

The RBA will announce its monthly interest rate just five hours before treasurer Scott Morrison delivers the federal budget in Canberra. A cut on budget day could complicate the economic messaging for the government, as it would signal concern in the central bank about the trajectory of the economy.

This chart shows the huge move in the market’s positioning for a rate cut next Tuesday after the inflation data dropped:

Although the move more likely reflects hedging against an unexpected move in the cash rate rather than a bet on it actually happening, it does reflect a dramatic shift in the market’s assessment of the challenge facing the RBA in its May meeting.

However Michael McCarthy, chief markets strategist at CMC Markets in Sydney, believes the chances of a budget-day rate cut are “less than 1%” because the RBA “has been very clear in indicating to the market that its concerns are around jobs and growth”.

“Unless things turn dire, the RBA would prefer to keep something up its sleeve in terms of rate,” McCarthy said.

“But I have to acknowledge I’m an outlier here… a lot of people in the markets seem to be anticipating an easier interest rate environment.”

The core CPI reading, the key data point that can move interest rates, printed at just 1.55% year on year. The RBA’s mandate is to maintain an inflation rate of between 2% and 3% through the cycle.

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