Markets rule out March rate cut, but RBA decision not cut and dried

Markets have fairly well priced out the chances of interest rates being cut to record lows in March.

As at the close yesterday the ASX 30-Day Interbank Cash Rate Futures March contract was trading at 97.050. This indicates only a 24% expectation of a rate decrease to 2.75% at the next RBA board meeting.

Source: www.asx.com.au

Is that decision cut and dried? It's probably a bit early to say so.

Guy Debelle of the RBA gave an interesting speech in Adelaide this week on the RBA's function in the financial markets.

It seems that the Reserve  Bank will not intervene on currency and again it was re-iterated that rates may yet be cut further as and when required:

It's going to be a rough old day on the stock markets (down ~1.2% so far) due to fears among investors that the gridlock in the Italian election could eventually impact Italy's ability to pay down its debt.

Key data will be released by the Australian Bureau of Statistics on Thursday in the form of the capital expenditure and expected expenditure.

Perhaps the most important chart will be the second of the three below, which shows total mining expenditure and expected expenditure.

If it appears that the mining capital expenditure boom is about to peak, another interest rate cut may yet not be far away. The RBA needs the rest of the economy to step up and plug the gap, and to date there does not seem to be much evidence of it so doing.

Source: ABS

Pete Wargent holds a range of finance and property qualifications and is the author of Get a Financial Grip – a simple plan for financial freedom.