Reserve Bank of Australia Rate Cut Odds Are Soaring [Chart]

Australia's weak September quarter annual core inflation figure of just 2.15 per cent, the slowest annual increase since the June quarter of 2012, has certainly created a stir in the markets.

The Australian dollar has been smoked and the ASX 200 is now in positive territory, a stark reversal to what was seen prior to the release of the inflation report.

The chief reason for the reversal in both the Australian dollar and stocks is the increased expectation that the weak inflation read may prompt the Reserve Bank of Australia (RBA) to cut the official cash rate to just 1.75% when it meets next week.

Cash rate futures put the odds of a 25 basis point rate cut in November at just 31 per cent at the close of trade yesterday.

Now, in the wake of inflation report, those odds have surged to 62 per cent.

While the majority of economists still believe that the RBA will leave the cash rate at 2.0 per cent, the majority in markets now deem a rate cut as the most likely scenario.

Given recent out-of-cycle mortgage rate increases from Australia’s largest banks, something that has tightened financial conditions for the majority of Australian households, there is absolutely nothing in the inflation report to prevent the RBA from reducing interest rates next week.

This article first appeared on Business Insider Australia


Comments

    You are getting odds and probability mixed up. Odds are never expressed as percentages whereas probabilities can be expressed as percentages. Also, odds are the inverse of probability.

    Cash rate futures put the odds of a 25 basis point rate cut in November at just 31 per cent at the close of trade yesterday.

    For example, to make it easier, let's say the probability in this case was 33.3% instead of 31%. The odds against rate cut in this case would be 2:1 or 2 to 1.

    Now, in the wake of inflation report, those odds have surged to 62 per cent.

    Assume that the figure is 66.6% instead of 62%, and then the odds against rate cut would be 1:2 or 1 to 2.

    So, the odds have actually DECREASED when the probability has INCREASED. Odds hasn't soared, but rather tanked.

    I'd take those odds: jobs aren't looking too bad, they're nervous about the housing market, the US is still on the fence about a rate rise, China's figures weren't that bad and the currency needs to stay down. (Note: not an expert)

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