During the first half of this year, the Reserve Bank of Australia (NYSE:RBA) cautioned the market of tighter monetary policy. But in just a matter of days, this threat has made a full 180-degree turn as speculations of a rate cut hit the financial market.
On Tuesday, at 3:30 am GMT, the RBA will announce its decision on interest rates. Even though it is widely expected that the central bank will keep unchanged at 4.75%, there are a few market participants, including me, who argue otherwise. Here are the top 4 reasons why a rate cut from the RBA is possible.1. Market confidence is very weak
One big problem right now that Australia faces is that consumers, the people who comprise more than two-thirds of Australia's economic activity, aren't confident about the economy at all. This is reflected in household credit growth as it headed to its lowest level in 35 years.
This means that we could see spending (and economic growth of course) tick down further until monetary policy is eased. This isn't something that the RBA wants, especially in this time of uncertainty.2. There are only two meetings left
The RBA normally meets every month, except for January. After December, the next interest rate meeting won't be until February.
This leaves the RBA only two chances to make things right for almost a four-month period. If they're going to slash rates, then they're going to do it in the next meeting. This will allow the central bank to adjust appropriately come their last "regular" monthly meeting in December.3. It is Melbourne Cup Day
In the last five years of his term, RBA governor Glenn Stevens has changed interest rates every single time on Melbourne Cup Day. Some may just put this off as coincidental, but I think it's an observable behavioral pattern. Stats are stats yo!4. Inflation is nowhere near the bank's target
The biggest argument for a rate hike is perhaps the unexpectedly weak inflation figures. Australia's s most recent consumer price index, the one that covered the third quarter of this year, showed that prices only rose by a measly 0.6%.
The trimmed version of the report, which excludes volatile items like gasoline and food items, only showed a 0.3% increase, less than half of the expected figure.
This means that mining boom speculations that were built up early last year DID NOT happen. The mining sector hasn't been having labor shortages, and global demand for commodities hasn't been as strong as expected. While there has been improvement in the remote parts of Australia, it has not translated to the rest of the economy.
Of course it's wrong to say that the unexpectedly low inflation figures will automatically result in a rate hike, but it is still something pretty significant since inflation has always played a big part whenever the RBA decides where to set interest rates.
Given all these reasons, I believe that we could see an interest rate cut this Tuesday. Some are pricing in as much as 50 basis point rate slash, but I think we'll see a more modest 25 basis point cut. If that happens, you better be prepared to hit that "sell" button!