Will the RBA cut in February?

The first RBA interest rate announcement of 2012 looms, and all signs point to the butcher’s block.

Expectations

Most of the nation’s economists, journalists and bookies are in agreement that the Reserve Bank will announce a rate cut of 25 points on Tuesday.

For the punters, you’ll get odds of 1.25:1 on a 25 point decrease, with no change sitting out at 3.5.

The ASX rate tracker, which uses trading in cash rate futures to calculate the chance of a rate change, shows the market has been trading with the expectation of a 0.25% rate decrease at the probability of around 80% for the past 10 days.

Reasons

Two big factors are in play at present: the external, global economy and the continuing under-performance of the US and EU; as well as the threat of inflation no longer driving monetary policy decisions.

With the IMF pulling no punches in its recent growth (or lack thereof) forecast, there is growing expectation that the RBA must cut rates to prepare for another tough period. The opposition’s Joe Hockey expects the Board to “do much of the initial heavy lifting and to stimulate economic growth by reducing rates”.

News.com.au journalist, Terry McCrann, sees the expected cut as an “exercise in housekeeping” rather than the signal of crisis – “a statement that inflation is no longer the threat is seemed mid-last year.” He goes on to say that a full pass-on of the cut from all the banks is highly unlikely, a hand forced by the “global financial turmoil” making it more expensive to the banks to raise funds.

Reality

Of course, the final decision rests on the shoulders of Glenn and friends – with the Board never afraid to make the media’s speculation look like just that.

The real ‘interest’ will be in the fallout, rate cut or no, from the banks. Mozo’s “Naughty or Nice” could take on quite a different look in 2012 if ANZ and friends remain true to their word of making interest rate adjustments independent of the RBA’s.

Come back Tuesday, 2:30PM for the announcement!

Read last month's Reserve Bank interest rates update.

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