The RBA meets on Tuesday 18 February and its decision has been heavily pre-empted by both the market and the majority of economists. This is the normal state of play, and because of this, the “experts” will predict any deviation from the course to be a market shock. According to Bloomberg, only 4 out of 34 market economists believe the rate will stay at 4.35%, all the others expecting a reduction to 4.10%. The RBA has managed to keep interest rate hikes well below the levels required in other economies, many of those calling for a cut today were looking for more vigorous action as rates rose.

Inflation is not yet settled in the RBA’s target range on many measures and the employment levels have been staggeringly good considering the point in the cycle that usually brings rate cuts. If the RBA is to remain circumspect on the need to cut rates as the Trump inspired trade wars begin to kick off, current market pricing as well as moral pressure will mean that this will count as a surprise and markets will overreact.

In the grand scheme of things, a 0.25% cut in rates is inconsequential in the economy. Importantly however, the ex-Chair of the US Federal Reserve Ben Bernanke famously said, "I think monetary policy is 98% talk and 2% action, and communication is a big part." The indication of a rate cut inevitably leads to further rate cuts and beginning a cycle is something central bankers do not do lightly.

The shortest ever period between an Australian rate cut and a hike was 5 months as a reversal of special measures during the GFC. A rate cut tomorrow signals a year of reductions and potentially 18 months before the RBA would normally consider a hike. The market has already priced the cash rate to be down 0.80% to around 3.55% by the end of the year. Fixed rate pricing already reflects this trend.

The outlier for market action is therefore a decision to leave rates at the current level of 4.35%. As the expectation of a cut is already priced in, markets will focus on whether the lack of action is a delay of an inevitable cut on April Fool’s Day or a more balanced concern that inflation is still disturbingly high. Because the market is so fully priced the implications of the latter will be significant.