Monday, 19 December 2011

A betting plunge on a 50bp rate cut in February

The betting odds for a 25bp interest rate cut from the RBA in February has come into $1.40 with Centrebet, with a 50bp cut also heavy supported into $4.50. No change is out to $3.25.

A few days ago, the odds were $2.20 for no change, $1.70 for a 25 cut and $7.50 for a 50 cut.

The huge shortening in odds is despite the RBA minutes today which some misinterpreted to suggest the interest rate cut in December was a close call. It wasn't. There is also the curious assessment from the RBA and those who never question the RBA judgement that the economy is growing at a trend pace - it isn't. That's false.

Just to reiterate - the economy is now growing at a below trend pace, a point proven by the softness in employment and the deceleration in inflation.

A quick economics lesson - when an economy is recording a trend rate of economic growth, unemployment and inflation are broadly steady. That is by definition.

This is not the case now. The unemployment rate his risen from 4.9% in early 2011 to 5.3% in November. Underlying inflation has fallen from 5.0% to under 2.5%. GDP growth has averaged a rather pedestrian 2.0% for the last 3 and a half years. Basic facts supporting the assessment of below trend growth.

As discussed here yesterday,, the market is correct to seriously consider a 50 bp cut in February. Today's RBA minutes do nothing to change that assessment and the betting market moves agree.

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