Rate cut now considered a certainty

Money markets are banking on a rate cut for next Tuesday. All that needs to happen now is for the RBA to deliver.

If not for the strong recovery in housing, the prospect of a rate cut by the Reserve Bank would have been considered a certainty.

By the start of trading this morning, the weight of money betting on a cut was about the highest on record at around 79%.

But the June private housing approval statistics released at 1130 AEST have swept away any doubts – at least among currency and money market traders – that Glenn Stevens will deliver a 25 basis point cut next Tuesday.

Housing approvals dropped 1.2% in June, a result that was far worse than expected. Most economists expected the strong growth evident for most of this year to continue. But the result was well below even the most pessimistic forecasters who had predicted only a tiny contraction.

The Australian dollar dropped sharply immediately after the figures were released and bond rates eased in anticipation of a rate cut while building materials stocks such as James Hardie, Fletcher Building, CSR and Boral all retreated.

But the currency fall is precisely what the Reserve Bank is actively pursuing. Pre-empting a rate cut, ironically, reduces the need for the central bank to actually cut rates.

Glenn Stevens’ lunchtime address today has now taken on even greater significance.

But after the misunderstandings from markets around Ben Bernanke’s comments in recent months and even the “joke” from Stevens earlier this month that the RBA board had deliberated at great length over last month’s decision, the droll central bank chief is likely to deliver a measured  and quite possibly incredibly dull speech.

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