Since about September last year, I have been of the view that the economic and financial market fundamentals would see the RBA cut the cash rate to 3.5% by around the middle of 2012. I will stick with this view for now. The issue jumping up at the moment is where to after that for interest rates in the latter part of 2012 and into 2013.
Based on recent data, a case is building that suggests the RBA may need to go below 3.5% over the medium term. The market is close to pricing in a 3.0% cash rate for early 2013 and clearly, this is where the risks are.
That said, it will take a sharp rise in unemployment and a further drop in inflation for the RBA to move official rates back towards the depths of the GFC levels, which coincidently was 3.0%.