Finance Finance News Rate cut likely, says baffled market

Rate cut likely, says baffled market

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Cheaper money may be days away, as futures traders bet on a cut to official interest rates when the Reserve Bank meets on Tuesday.

A string of surprise events, including a rebound in the price of iron ore, a surge in the Aussie dollar, and warnings of a credit rating downgrade have left traders at a loss over whether or not there will be a rate cut this month.

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But at market close on Thursday, 62 per cent of futures traders were betting on a rate cut to 2 per cent on May 5, up from 50 per cent two days earlier.

A number of factors may have influenced this. A spike in the dollar to above 80 US cents in recent days makes the RBA more likely to cut rates to push the dollar down.

Another factor is that it looks like the banking regulator APRA is set to clamp down on the banks’ excessive property lending.

One reason the RBA has hesitated in lowering rates is the fear that lower rates would fuel more property speculation. If APRA takes responsibility for this problem, that will free up the RBA to cut rates.

But most importantly, the RBA has today been given the latest quarterly outlook. If, as expected, the outlook predicts a drop in business investment across the economy, then the RBA is likely to cut rates.

Currency traders also seem to be inclining towards a rate cut on Tuesday, with the dollar dipping back below the 80 cents mark. At 10:09 AEST the dollar was trading at US$0.7898.

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