Interest Rate Betting - A February cut is long odds on

The 7 February Board meeting is shaping up to be a doozie.  There are more than the usual arguments for the RBA deciding to keep the cash rate steady, for cutting 25 basis points and even cutting 50.

These will not be canvassed here, but the current OIS market is pricing in about a 90% chance of a 25 basis point cut.  Or is that a 10% chance of no change or a 45% chance of a 50bp cut?

Whatever.

The bookies are allowed to offer fixed price odds on changes in official interest rates and this is what they currently are pricing for the February RBA Board meeting:

	TAB	Lux	Sportsbet	Centrebet
No Change	3.30	3.50	4.00	3.35
25bp cut	1.33	1.28	1.22	1.28
50bp cut	na	9.00	9.00	6.50
50 bp cut or more	11.00	na	na	na
75 bp cut	na	34.00	21.00	21.00

Something for everyone - I have left off the odds for a rate hike.

While this is NOT a recommendation, it is clear from the above odds that the TAB is offering the most generous returns for those in the rate cutting camp.

$11.00 for a 50 cut or more would be a good bet if the RBA is viewing the current global Lesser Depression, the local jobs and inflation data and the current stance of fiscal policy as drivers of the need to get the cash rate to a mildly accommodative stance.  This is further enhanced by the jump in bank funding costs.  A one in ten chance of a 50 cut in these circumstances?  Sure.

For a likely 25 basis point cut, the $1.33 on offer sees a 33% tax free return, if the RBA choses that option.  The odds look short, but for any with a strong conviction on that move, it’s not a bad return and would suggest a more steady approach from the RBA and of course, they meet 4 weeks later and can go another 25 then as required.

For those thinking the RBA may be on hold, for whatever convoluted reasons, the $4.00 on offer from Sportsbet would seem too good to be true.  A 300% tax free return if the RBA choses to hold the line... thanks!

These odds will change with data and events between now and next week.  Let's see how they end up, but in the last few months, the big shorteners (25 cut) have taken the prize.  The money has been spot on.