Could the RBA pull an interest rate rabbit out of the hat on Tuesday?
The latest OIS pricing for Australian interest rates is an 80% probability of a 25bp cut tomorrow. I'm starting to think that the RBA may go for some shock and awe and pull a 50bp cut out of the bag
We know that Stevens wants the aussie dollar lower, and that the economy is showing enough signs of weakness to warrant a cut, but if he cuts by just 25bp it's likely to be followed by further cuts or at least some very dovish rhetoric. Going for the shock factor of a 50bp cut would essentially lay the groundwork for the economy and catch the market on the back foot. Follow it up with the dovish chatter, which will keep the market guessing, and that will be enough to see the aussie dollar really crap out and take a bearish turn. The probability of a 50bp cut was around 30% a month ago and it is virtually zero now, so it's not widely expected.
Of course a rate cut won't fix all woes and will potentially add some air to the housing bubble. That could well be a small price to pay for looking at the long game and the whole economy
There's times when you look at how a monetary policy meeting is shaping up and whether a market is getting too complacent over the expected result. In this case we're unlikely to see much reaction from a 25bp cut outside of an algo knee jerk, unless it's followed by comments detailing further cuts to come.
It may not be a game central banks like the Fed, BOE or ECB like to play but to a central bank like the RBA and a governor like Glenn Stevens, taking an opportunity to wrong foot the market to their advantage could be too good a chance to pass up on
Want to know what he's thinking?
