Melbourne Cup Interest Rate Cut A 'Line Ball' Call

29/10/2015 10:57 AM AEDT | Updated 15/07/2016 12:50 PM AEST
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A race-Melbourne Cup, Victoria, Australia

SYDNEY -- The odds have tipped in favour of a Melbourne Cup Day interest rate cut, with markets pricing in an almost 70 per cent chance the Reserve Bank will trim rates when it meets on Tuesday.

Financial markets are now factoring in a 67 per cent chance the RBA will slash the cash rate to record low of 1.75 percent, while 33 per cent of market players believe the RBA will keep rates on hold at 2 percent, where they have been since May.

A week ago, just 29 per cent of market participants were backing a rate cut.

The RBA's rate decision will be handed down 2.30pm Tuesday, less than an hour before the start of the Melbourne Cup.

Commsec chief economist Craig James said whether the central bank would trim rates remained a "line ball call" after better-than-expected inflation figures were released on Wednesday.

"It's a situation we haven't been faced with beforehand where the banks have lifted interest rates independently to be able to recoup some of the costs of increasing capital," James told the Huffington Post Australia.

"At the same time we have an inflation figure that's a bit on the low side.

"Investors and borrowers should brace for the potential of an interest rate cut on Tuesday."

He said whatever decision the RBA made, it wouldn't be easy.

"If they cut interest rates they've got to decide... if it's going to do any good," James added.

"If you put interest rates down too low what happens when we do have a serious problem (is) you've got to go to alternative measures like they've done in the rest of the world."

The boosted chance of a cut comes after speculation the Reserve Bank will move on rates to counter recent increases by the four major retail banks.

National Australia Bank, the Commonwealth Bank, Westpac and ANZ have all lifted mortgage rates in the last two weeks amid debate over whether returns to investors should drop due to the sector being made safer.

On Wednesday, Prime Minister Malcolm Turnbull said the banks had "overdone it" by increasing mortgage rates more than they need to cover their costs.

Turnbull's comments came on the same day as NAB revealed a $6.3b profit, up 20 percent from the previous year.

On Thursday morning, ANZ announced a record $7.2 billion profit for 2014-15, which was slightly lower than expected.

CommSec's James said "no one should be surprised" if the RBA ended up slashing rates on Tuesday, noting that the board would also be weighing up the effect of a cut on the Sydney and Melbourne property markets.

"Interest rate increases have caused people to be a little bit more circumspect (on property), which probably in the whole scheme of things is a good thing," he said.

If the central bank does trim the cash rate, recent form suggests the major banks may be unlikely to pass the full cut on to borrowers, meaning those out-and-about on Cup Day may not want to celebrate too much, unless you've picked a winner.

Meanwhile, more than half of Australia's small businesses think the economy has stalled, according to new research.

The latest Sensis Business Index, released Thursday, found 55 percent of small firms thought the economy was at a standstill, while 32 per cent believed it was slowing.

Just 13 percent thought the local economy grew in the three months to August, the survey of 1000 small businesses found.

"Given recent events on global stock markets and with Australian unemployment on the rise, it is not surprising to see that only 13 percent of businesses think the economy is growing," Sensis chief executive John Allan said.

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