Pricing for a fresh 25 basis point rate cut on Tuesday advanced from an outside chance last week to a foregone conclusion on Monday, following a torrid weekend for a rattled global economy.
Those bets eased slightly on Tuesday morning as global markets rebounded on hopes of fresh stimulus from central banks.
The Dow Jones Industrial Average surged by more than five per cent overnight, while the S&P 500 and Nasdaq each jumped more than four per cent in a strong rebound from last week’s virus-driven rout.
The US Federal Reserve is expected to cut rates later this month.
Australian stocks also experienced a dramatic turnaround on Monday, recovering from huge losses early in the session amid hopes the Reserve Bank will cut the rate for the fourth time in less than a year.
Expectations the RBA will attempt to further ease lending costs are almost fully priced in, according to the ASX 30-Day Interbank Cash Rate Futures.
Economists on Monday clamoured to bring forward their rate cut predictions after a weekend marred by poor data out of China and a global equities sell-off.
Many are now tipping back-to-back rate reductions in March and April.
Australia’s interest rate had already been lowered lowered three times to 0.75 per cent last year in a bid to free up cash for tightening household budgets.
The central bank board in February delayed cutting to a fresh record low 0.5 per cent, with RBA Governor Philip Lowe citing improved unemployment figures for December, low borrowing costs, recent tax refunds and improved property market indicators.
However, economic data has since been weak as retail sales, construction and business investment fall, confidence remains soft, poor wages growth continues and unemployment and underemployment rise.
The summer’s bushfires have also added pressure and will drag further on what was already expected to be a weak December quarter GDP print on Wednesday.
Meanwhile, IG markets analyst Kyle Rodda says a “marginal chance” remains the RBA will cut by 50 basis points on Tuesday to its effective lower bound of 0.25 per cent.
JP Morgan’s Sally Auld also said a 0.50 percentage point cut was no small chance.
Such a move would open the door to alternative monetary policy – such as a quantitative easing program – in the not-too-distant future.
The RBA will announce its interest rate decision at 1430 AEDT.
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