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Friday, 1 May 2015

May 5 interest rate cut is live

Rates to fall

Markets were distinctly unsure about an interest rate cut on May 5 at the close yesterday.

The implied yield curve continued to price in another cut in 2015.

And then Peter Martin released this via Fairfax Media:

"Concern about a deteriorating economic outlook and a resurgent Australian dollar will force the Reserve Bank to cut interest rates on Tuesday, taking the official cash rate to an all-time low of 2 per cent and discounted mortgage rates to just 4.55 per cent.

The Australian dollar touched US80¢ on Thursday, a level the Reserve Bank governor Glenn Stevens has previously said was well above its fundamental value.

Among the concerns driving the bank is a realisation that unless it cuts its cash rate on Tuesday, financial markets will stop believing that it is prepared to cut and push the dollar even higher."

Recall that on the Thursday before the February meeting (at which the Reserve Bank cut rates) Terry McCrann released this very similar piece.

Yesterday's media release moved market pricing and the Australian dollar dropped noticeably by nearly 50 pips, so markets clearly believe that the piece is very credible.