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Low chance of rate cut despite Brexit


house_sale.jpgWith the Brexit vote sending shockwaves through global markets, it's worth wondering why the futures market is only giving a one-in-five chance to the RBA cutting interest rates next week.

Even last Friday afternoon, as news that British voters had opted to exit the European Union spread across a shocked world, the market put the odds of a July cut in Australia at 45 per cent at most, a sentiment that lasted only a few hours.

Most economists have been expecting a cut, taking the cash rate to 1.5 per cent from its current 1.75 per cent, but not until August.

Currently, market pricing puts the expected cash rate following the Reserve Bank board meeting on Tuesday at 1.7 per cent.

That's only one fifth of the way from the current setting of 1.75 per cent to 1.5 per cent, suggesting the market doesn't expect the RBA to hit the panic button next week.

For the August 2 policy meeting, the market puts the odds of a cut at about four in five, in line with the central bank's preference to hitch its rate moves to the latest quarterly inflation report.

The June quarter consumer price index figures are due the week before the August meeting.

They are widely expected to vindicate the RBA's view that the slowdown in inflation to just 1.3 per cent over the year to March was not just a temporary dip below the two to three per cent target band.

That would provide a rationale for another cut as the CPI figures did in May.

Market players seem to be assuming the central bank will stick with its usual game plan in the absence of any hints to the contrary.

And, only days after the Brexit vote, there's a plausible argument that the central bank might be inclined to wait until the dust has settled.

Or perhaps market traders have simply been too distracted by the big moves in share and bond markets to give much thought to the RBA's plans.

Even so, there's no doubt that the Brexit vote has clouded the outlook for the global economy - something that is always a focus for the RBA's monthly deliberations.

At the same time the Australian dollar, consistently noted by the RBA as a potential obstacle to the economy's transition away from dependence on mining investment, has been edging up.

The Aussie has not yet retraced all of the falls seen after the May rate cut but if it attracts the same "safe-haven" buying that led to its overvaluation during the Greek financial crisis, it would be another reason for the RBA to make its move sooner than expected.

And yet the futures market puts the chance of a rate cut next week at no more than it has, on average, over the past month.

It may be time to reconsider.
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