RBA likely to signal very modest easing bias - NAB

FXStreet (Bali) - At its monetary policy meeting later today, the RBA is likely to signal a very modest easing bias, according to Peter Jolly, Global Head of Research at NAB.

Key Quotes

"The RBA Board is sure to leave the cash rate at 2% on Tuesday and their Statement is likely to again signal a very modest easing bias. Absolutely no intent, but nonetheless an acknowledgement that if needed they still have 200bps of interest rates to play with."

"While the RBA has 200bps in the bank, it’s clear there is a reluctance to use it – i.e. the hurdle to cut again is fairly high1. Given the high hurdle I expect a fair amount would need to go wrong – not just fail to get better – for the RBA to cut again. Put another way, it’s less likely the RBA will be tinkering with 25bps cuts here or there and it may be best to consider the final 200bps as an emergency reserve – i.e. if the economy is turning down again (the unemployment rate is headed to 7% or beyond) then pull very hard."

"Market pricing puts 16.5% chance on RBA cutting to zero? For mine, this disaster or not lens is a more useful way of assessing what interest rate markets are now telling us. The OIS market prices 33bps of cuts in the year ahead – it reached a low point of 39bps as the stockmarkets swooned early last week."

"Market pricing reflects a weighted average of possible outcomes for the RBA’s cash rate, so there are a number of ways we could interpret this 33bps. A very narrow interpretation would be to say there is a 100% chance the RBA will cut by 33bps over the next year – no one believes that. An equally narrow interpretation2, but perhaps a more useful one, is that if we put the 33bps of priced cuts alongside the RBA’s high hurdle to cut again we could say markets are pricing a 16.5% chance the RBA will take the cash rate to zero in the year ahead."