Forget 50/50: Rate cut prospect less than 10%: ANZ

While current market pricing points to around a 50% chance of further easing by the end of the year, ANZ modelling puts the prospect at less than 10% chance of occurring. 

"The results of our probit model are consistent with ANZ’s view of how the economy is evolving and suggests that the market is too complacent about prospects of monetary policy nominalisation," the report by ANZ Research economists Dylan Eades, Savita Singh, and Felicity Emmett said.

The bank said while momentum in the domestic economy has softened recently, most indicators are continuing to point to a gradual improvement in the non-mining sectors of the economy.

"As such, we continue to expect the RBA to be on hold for some time, before commencing a gradual hiking cycle in early 2015. 

"While we think that the hurdle for further rate cuts is high, we remain cognisant that a number of risks remain that could push out the start of the RBA’s tightening cycle.

"Indeed, the ongoing strength in the Australian dollar combined with a moderation in domestic dataflow suggests that the risks, at this stage, are tilted towards a slightly later start to the tightening cycle, rather than the risk being that the next move in rates is down."

After testing a number of indicators, ANZ found that the indicators which had the best power to predict a cut in the cash rate were:

• The NAB business survey’s index of profitability (with a five month lag),
• Three-month ended growth in retail sales (with a six month lag),
• The level of building approvals (with a six month lag),
• A subseries in Westpac-Melbourne-Institute’s consumer confidence survey that is more correlated with household consumption growth, ‘family finances compared to a year ago’ (with a five month lag),
• The spread between the Australian 10-year bond yield and 90-day bank bill (with a six month lag), and
• The level of the cash rate