Money market traders have almost written off the chance of another official rate cut at the Reserve Bank’s monthly board meeting on Tuesday.
Recent trading in cash rate futures on the ASX suggests there is only a six per cent possibility of a rate cut this month despite economists’ concerns that the sharp decline in private sector investment could retard growth.
The RBA has already lowered rates twice this year, with last month’s 0.25 per cent cut reducing the official cash rate to 2 per cent.
While the overwhelming view among cash traders and economists is that the central bank will sit tight this month, pricing of ASX cash rate futures implies that another rate cut is expected by the market before March next year.
Westpac chief economist Bill Evans told clients in his weekly newsletter that the RBA was still leaning to further easing monetary policy.
“We expect that there is little to no chance that rates will change,” Mr Evans said. “Having said that, it is clear that the Bank currently holds a ‘soft easing bias’.”
Mr Evans expects the RBA to reduce rates again this year, but the likelihood of this happening might depend on the timing and depth of interest rate hikes in the US.
The US Federal Reserve is still expected to raise official rates later this year, a move that would probably cause the American dollar to strengthen against other currencies, including the Aussie dollar.
If the Aussie currency was to fall significantly in response to US rate increases, the RBA might have one less reason to cut local rates again.
Market Economics director, Stephen Koukoulas, believes the RBA might hold back on another rate cut if the currency continues to fall.
“It would be no shock that the RBA would continue to hold if the Australian dollar was to fall to around 70 US cents,” he said. “That could happen if US rates began to rise in the second half of this year.”