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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Thursday, 29 January 2015

Stand by for interest rate cuts (plural)

Markets react to inflation data

I had a look through the mixed reaction to yesterday's inflation data here.

Currency markets and futures markets generally took the somewhat higher than expected core inflation readings to mean that interest rate cuts may be deferred or pushed out to March or beyond.

By the close of trade yesterday February cash rate futures contracts were trading at 97.535, thus implying only a fairly remote one-in-six chance of a cut in interest rates at next week's meeting to 2.25 percent.

The implied yield curve remained inverted, essentially pricing in two cuts by the end of 2016.

It's not what the Reserve Bank was planning necessarily, but with interest rates globally cascading lower - a trend exacerbated by lower oil prices - Australia's 2.50 percent interest rate is comparatively high for the industrialised world economies.

Deflation is increasingly being seen across the world as a bigger risk than high inflation.

All clear then?

Weeell, not quite...

February rate cut "almost a certainty"

The Reserve Bank is clearly very keen on issuing forward guidance to markets - and when the Board met way back in the first week of December, the official line was still that "the most prudent course is likely to be a period of stability in interest rates".

Step forward the Reserve's alleged mouthpiece Terry McCrann to deliver a series of extraordinarily specific reasons as to why interest rates will be cut, and "almost certainly" as soon as February.

In short, the RBA was not too keen to cut interest rates once, but now that it sees "two to four" interest rate cuts as potentially necessary, Stevens will be moved into action.

"After 18 months of keeping its official interest rate unchanged, the Reserve Bank will almost certainly cut the rate at its first meeting back for the year next Tuesday.

What is absolutely certain is that the key language in RBA governor Glenn Stevens’s post-meeting statement will change. That would obviously be the case if he’s announcing a 25-point cut, but it would change to “signalling a future cut” even in the now unlikely case the rate was left unchanged."

Elucidates McCrann:

"Last year it continually contemplated a — to stress, single — rate cut and determined there was no point; that a period of stability was preferable.

Now, it sees a series of rate cuts — at least two 25-pointers, perhaps as many as four — as not just likely but all-but as inevitable through 2015. Crudely, with that expectation, there’s no point in starting the year by “umming and ahing”, but to, well, make a start.

It’s also the Stevens style. If commentators should have learned one thing about the “guv” in eight years, it is that when he comes to a viewpoint he acts"

The full article you can read here.

The information was clearly treated as credible by markets which are now pricing in an each-way bet of rates being cut in February and a cash rate of below 2 percent in 2016.

Hang on to your hats, then.

As McCrann himself puts it, a series of "two to four" rate cuts is set to pour further fuel on to particularly Sydney's property market bonfire.

A series of cuts is also likely to reignite lending to investors in other markets. 

Personally I get the sense that there is a good deal of increased interest for interstate investors looking at the Brisbane market, as the next few months of housing finance data will likely confirm.


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