Will S&P/ASX 200 Index (ASX: XJO) investors expecting to see the Reserve Bank of Australia cut the official interest rate tomorrow get what they're anticipating?
Or will they be in for an unwelcome surprise?
Well, if you go by money market expectations, the odds of an RBA interest rate reduction tomorrow stand at 90% (as of Friday 14 February), according to the RBA Rate Indicator. That's down from 95% on 11 February but still indicates a lot of investor confidence in a pending rate cut.
As you're likely aware, the official cash rate in Australia has been stuck at 4.35% now since November 2023. That's the highest lending rate Aussies have endured since December 2011 as the central bank worked to tamp down runaway inflation.
The last time ASX 200 investors enjoyed an interest rate cut was back in November 2020, when the RBA slashed rates to the historic low of 0.10%.
But with core inflation, the RBA's preferred measure, falling to 3.2% in the December quarter, the next rate cut may be less than a day away.
Will the RBA cut interest rates tomorrow, or won't they?
For some greater insight into what ASX 200 investors might expect from the RBA's interest rate decision tomorrow, we turn to some leading experts.
Rob Talevski, CEO of Webull Securities Australia, advises investors not to bet the house on a rate cut.
"While a cut by the RBA is all but baked in by the futures markets and bank analyst consensus, complexities remain, making the RBA's choice more difficult than it may initially appear," Talevski said.
He added:
Unknown outcomes from recent US policy shifts and persistent weakness in China will certainly be on the Bank's radar, and it wouldn't be outside of the realm of possibility that the RBA will wait until March for the dust to settle.
Josh Gilbert, market analyst at eToro, also advises ASX 200 investors to remain nimble pending the RBA interest rate meeting outcome tomorrow.
Gilbert said:
Certainly, the numbers support a rate cut, but the RBA is not one to be swayed by pressure and the central bank chair Michelle Bullock has not given any solid indications of her sentiment heading into this meeting.
Gilbert noted that "this could easily be another pause under the belief that there is work to be done to keep inflation tamed as international economic conditions become more volatile".
Jonathan Kearns, chief economist at Challenger, said (quoted by The Australian Financial Review), "It's a more balanced call than the 90% market pricing as there are credible arguments for and against. On balance I expect the RBA will cut."
Paul Bloxham, chief economist at HSBC Australia, agreed. He said, "In market parlance, we expect a 'hawkish cut', rather than a 'dovish hold'."
And Jo Masters, chief economist at Barrenjoey, also believes the market is being too optimistic on pricing in an interest rate cut tomorrow.
"The CPI data has opened the door to a February cut, but we see the odds at 50:50. The market pricing is a bit confident." Master said. "There's a number of plausible scenarios, and you can't put a probability on any of them because it's moving still under your feet and very quickly."
Among the issues the RBA will be concerned with is that lowering interest rates will further pressure an already depressed Aussie dollar. This could rekindle inflation by increasing the costs of imports and international travel.
With so many investors confident in a pending RBA interest rate cut tomorrow, any failure to deliver on those expectations could see the ASX 200 take a big dive lower mid-day while delivering on the expected cut should boost the benchmark.
The RBA reports its decision at 14:30 AEDT on Tuesday.
