Cash markets in the week before the RBA’s Cup Day meeting have placed little weight on a rate cut on November 1. In fact, “little weight” is itself overstating the likelihood of a rate cut, given the price of a November cash contract implies a 4% chance. So it seems somewhat unusual or out of place for one of the major banks to expect a rate cut next week.
So why does CBA think the RBA will do such a thing? Lots of other economist and commentators expect another rate cut but not until 2017, at one or more of the February, May or August meetings. CBA acknowledges the cash markets are pricing a cut as close to a zero probability but in its opinion, it should be more like 50%.
Its view is based on its belief “the era of low inflation is still continuing.” When September quarter CPI figures were released a few days ago, the headline rate of 0.7% was higher than expected. CBA points out how “all the seasonal adjusted measures show that inflation in Q3 is actually lower than it was in Q2.” CBA thinks the market is focussed on the wrong thing and most of the market has not looked past the headline results. “The headline CPI result… argues for leaving the cash rate unchanged next week. It’s the only part of the CPI release that does. Every other measure of CPI shows a continuing, very weak inflation pulse….We expect the RBA will look through the seasonality and see that inflation remains exceptionally low. That should see them cut rates next week…”
