The RBA meets today to talk about the 13th rate cut since 2001. Of the twelve prior rate cuts, this is the closest call that I can remember (I was more confident – or just feeling lucky! – prior to the 50bps cut in May 2012 and the pause at 4.25% in Feb 2012).
Market pricing remains about 50/50, which would make this the first time the RBA has cut with so little priced (since the IBs started trading in 2003). Since 2001, the RBA has eased rates only when the market had priced in about a 70% chance of a cut. I think that this reflects the degree of inertia in the RBA’s decision-making (that is, they like to be deliberate about how they do things so they tend to move when it’s obvious).
By contrast, there have been 47 meetings where the RBA has held their rate steady despite the market having priced in some possibility of a rate cut.
The biggest surprise was the March 2009 RBA meeting, where the market had 22.5bps priced and the RBA held steady at 3.25%. Other big disappointments were Feb 2012 (-14bps priced) and Nov 2012 (-11bps priced — which I bombed).
So what can we take from this? I think it’s that the market may be a little biased as a predictor of rate cuts. If this is the case, the true probability of a cut today is probably a little less than 50%. My subjective judgement is ~33%.
The main reason is that Q1 demand has been better than the RBA expected (see this post). My read of the statement has been that the easing bias is about the need to prop up demand — and demand has not been softer than the RBA’s forecasts.
This makes me think a hold is the more likely outcome today.
Sure, demand isn’t great either (especially the nominal stuff), but the RBA’s forecasts were already for weak growth, and the data simply hasn’t been worse than they expected. Thus, i think a rate cut would seem a little incoherent.
They might justify it in terms of low inflation, or flagging global demand, but i think it’s more likely they point to those things when setting up for a possible June cut. After all, the housing market is looking pretty good, financial market conditions continue to ease (Spain and Italy are ~100bps tighter, equities are +4%), and the data might just turn up.