RBA set to go all the way with a 50 point cut on Tuesday.
Good morning.
Next Tuesday's RBA board meeting is lining up as a watershed for domestic monetary policy, with the RBA likely to cut the cash target rate by 50 bp to 6.5%.
Stalling global growth, falling commodities prices and the serious liquidity issues, line up support for a more aggressive rate cut in Australia. Strong policy moves by the RBA over the past few years has positioned domestic monetary policy at levels where significant reductions can be made and be meaningful.
Whilst the RBA has been the champion of gradual moves, there clearly appears to be sufficient risks for the Central Bank to give policy a good shunt downwards.
Inflation is no longing a talking point in most market circles, and despite initial scepticism of the RBA's lower forecasts for inflation to decline in 2009 and 2010, it is very interesting to see many other Central Banks also lower inflation forecasts for their domestic economies.
Recent Central Bank comments on inflation line up with the RBA.
FOMC statement of 16 September.
"The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain"
Bof England 15 September.
ECB 2 October
"Upside risks to price stability have diminished somewhat, but they have not disappeared,"
Domestic indicators .
Considerations by the RBA will focus on the "scope for monetary policy to become less restrictive", which they stated after last's month Board meeting, and appears as an on-going policy attitude.
Clearly household demand and economic activity is slowing, unemployment is likely to rise, and commodity prices have fallen sharply, thus lessening the favourable terms of trade, which has been the one shining point for the domestic economy. With the Aussie back at it's long term average of 77 cents, export benefits have been reduced considerably.
So with inflation concerns on the back burner, a confluence of soft growth indicators, and a severe liquidity crisis still unfolding, there is little to stand in the way of a more aggressive stance of the RBA.
Market pricing in Interest rate futures.
Often cited by the RBA as a positive for change, interest rate futures pricing is confirming opinion for a 50 point reduction, with the October 30 cash contract trading today at just 1 point under a 6.50% cash rate at settlement.
Bank bill yields have fallen sharply since the quarter end yield spike, with December 08 bank bills futures nudging lower toward 6.25%, and the spot 90 day bank bill yield trading at 7%.
The attached graph show the current RBA cash rate (yellow) and the spot 90 day bank bill yield (in red.)
With 90 day bills declining to the cash rate in anticipation or a cut in the RBA cash target rate, there has been a significant reduction in some bank funding costs, albeit for a shorter period that occurred in August. The green line shows the sharp reduction in three year swap rates, to bonds, but does not include credit spreads.
Pass through by the trading banks.
The key word in this debate is 'majority', with the ANZ using it to indicate their intentions. In the run up to the quarter end some money market rates spiked and it does appear that there will be a funding cost claw back by the trading banks.
This is not to suggest that the RBA will be pushed into a deeper reduction to accommodate the banks, but a 50 point cut should see at least 40 points pass on to mortgage borrowers. Any greater "take" than 10 points would incur the wrath of authorities.
With king regards,
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