- The RBA will announce its February interest rate decision later today.
- It previously communicated that the next move in Australia’s cash rate was likely to be higher. Financial markets used to think the same, but now they strongly disagree.
- TD Securities outlines the various scenarios on what the RBA may say, along with the potential market reaction to each.
Safe to say, there’s more interest in today’s RBA interest rate decision than an any point in recent years.
Having previously placed faith in the RBA’s view that the next move in the cash rate is likely to be higher, financial markets, collectively, now strongly disagree, pricing in a greater than 50% chance that rates will be reduced by the end of this year.
A small but increasing number of economists also share this view.
Given the divergence in opinion to what the RBA was communicating late last year, it ensures there will be a lot of focus on the February policy statement when it is released at 2.30pm in Sydney.
Will the RBA retain a half-glass-full perspective on the outlook for the economy, and hint that it still sees the next move in the cash rate as being higher? Or will it, like markets, capitulate and express uncertainty as to whether tighter policy will be warranted in the period ahead?
For TD Securities Global Rates, FX and Commodities Strategy team, the most likely outcome today will be that the RBA will stick to script, putting faith in above-trend economic growth and lower unemployment to help gradually lift inflation towards the midpoint of its 2-3% target.
However, for the first time in a long time, it says such an outcome is anything but guaranteed, suggesting there’s a reasonable chance that the bank will turn dovish, ensuring expectations that rates could be cut will remain firmly in place.
Here’s a nifty table from TD Securities outlining various scenarios on what the RBA may communicate, along with a probability of each occurring as well as the likely reaction in Australian financial markets.
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