Is the RBA going to cut interest rates in 2016?

Australia’s central bank, the Reserve Bank of Australia (RBA) may well be forced to cut the official cash rate at least once in 2016, according to new data.

In November 2015, RBA governor Glenn Stevens told a conference in Melbourne that if interest rates were to move in the near term, Australians would see a cut rather than an increase. The current cash rate is 2%.

According to Citigroup’s latest interest rate futures pricing, the chances of a rate cut to 1.75% at the RBA’s June 2016 board meeting have jumped to 100% this week, up from 50% late last year.

ANZ senior economist Justin Fabo has told Fairfax media that the risks around monetary policy are still tilted towards further easing rather than rising.

The odds of a rate cut in February 2016 according to the ASX is 17% and a 40% chance of rate cut in March, but the market doesn’t always get it right.

The RBA surprised the market in February 2015 with a 0.25% rate cut following oil prices sliding and a downward revision to the inflation outlook.

HSBC’s Paul Bloxham says that the odds of a rate cut will increase if the oil price continues to sink [or even stay very low] and the consumer price index (CPI) data for December 2015 comes in low.

The RBA’s main goal is to keep inflation (or CPI) in a band between 2% and 3% and it does this by lowering or raising the official cash rate. Lower interest rates should stimulate the economy and push CPI upwards, while raising rates has the effect of subduing market activity and pushing inflation down.

One thing the RBA won’t be too worried about if it needs to cut interest rates will be the effect on the property market. Thanks to some pushing by the banking regulator, APRA, the big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) all introduced new measures to discourage property investors from overextending their finances and slow the rate of investor loan growth.

Foolish takeaway

I wouldn’t be surprised to see the RBA cut the official cash rate again this year, after 2 cuts in 2015. Low rates appear here to stay for some time.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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