Rates to fall to 1.75 percent?
So say futures markets.
With March cash rate futures contracts trading at 97,875 this indicates a likelihood of a cut as soon as March 3 to an official cash rate of 2 percent being priced as a 56 percent chance at the close yesterday.
With the iron ore spot price resuming its downtrend after Chinese New Year, these odds could sneak higher.
Implied yields on December 2015 contracts have sunk incredibly low at just 1.715 percent, suggesting that the market believes we will see two more 25bps rate cuts by the end of this calendar year.
The case for cuts
The case for further cuts is clear enough (see links for my more detailed analysis of each factor):
-trend employment growing, but not as fast as the size of the labour force, and thus unemployment is rising;
-an alarming increase in regional unemployment in certain areas;
-headline inflation of only 1.7 percent, with the preferred underlying readings averaging 2.25 percent, being in the lower half of the 2-3 percent target range;
-capex expected to decline sharply over the year ahead;
-GDP growth forecast to remain below trend for some time;
-a dramatic correction in the Commodities Index, particularly in bulk markets; and
-some other stuff.
And the case for keeping rates on hold?
Arguments mainly seemed to be based around:
-keeping some dry powder in case of future emergencies;
-lower interest rates may not have much positive impact on sentiment; and
-lower interest rates could cause house prices in Sydney to boom.
The March decision may hang in the balance, but markets see further cuts this year as being very likely.