RBA Set to Cut But Will it Help the Economy?
Rowan Crosby • 2 min read
There is a fair bit of controversy surrounding the looming rate cut by the RBA today.
First and foremost, it is far from a certainty. At last check, the market was pricing in a 79% chance of a 25bp rate cut. That would take the OCR to 0.75%, down from the already record-low level of 1.0%.
So that means that there is clearly no certainty that a cut will in-fact happen.
There is enough room in what we’ve heard from Lowe, to suggest we need to expect anything. We could even see a 10bp cut or none at all. So we should be prepared for anything.
There is also growing opinion around Australia that the cuts won’t make much of an impact anyhow.
The major banks in Australia aren’t likely to pass these rate cuts onto borrowers. So in effect, one of the big weapons the RBA is trying to fire, might not really even hit anywhere near the target.
There are many business leaders and experts who are also thinking along the same lines, saying that they believe rate cuts are coming to the end of their effectiveness.
In terms of what that means for the AUD/USD, it might be a tricky trade to make.
A cut will weigh on the Aussie clearly and there is still room for more downside given that the cuts are only 79% priced in.
But going forward, if the banks won’t pass them on and the given that the AUD is just about where the RBA would be happy with, then this might be a point where there is little more downside to be achieved.
That said, shorts are fully loaded going into this meeting. But 0.6700 looks a distinct possibility.
The odds the RBA cuts the cash rate to 0.5% by the end of the year is just 36% but 0.5% is fully priced in by May 2020.