With AUDUSD reaching fresh decade lows last week and house prices rising, the RBA has considerable tail winds to weigh against the incoming coronavirus shock at Tuesday’s meeting.
After leaving rates unchanged in February, Governor Lowe once again noted the costs of exceptionally low interest rates in a speech.
Australian fixed income markets were extraordinarily volatile on Friday. Pricing calculated by Bloomberg suggested that market expectations of a rate cut at Tuesday’s meeting had soared from around 14% on Thursday to above 80%.
This occurred in a matter of hours. This rapid move suggests overwhelming expectations of easing, and high pressure on the RBA to deliver on expectations.
The outcome of the RBA meeting is unknown, but we assign a subjective 70% likelihood to a cut, up from 30% in our last AUD note – which was written early last week!
With markets pricing a rate cut so aggressively, failing to deliver risks an inadvertent tightening of financial conditions, although this may not be something that will worry the RBA as much as G3 central banks such as the Fed.
One marginal data point that may move the needle for the RBA will be CoreLogic House Prices on Saturday 1st March.
With official house prices only released on a quarterly basis, if the index shows further cooling after January’s slowdown in growth, the RBA could consider the weakening of tail winds to consumer spending from house prices.
Author: Ranko Berich, Head of Market Analysis at Monex Europe.