Will ASX 200 investors get a supersized RBA interest rate cut tomorrow?

MotleyFool
07 Jul

S&P/ASX 200 Index (ASX: XJO) investors and mortgage holders alike will find out tomorrow if there's another interest rate cut on the cards for July.

They'll also find out if the bank opts for the bold move of making a supersized 0.50% cut, which would likely give markets a material short-term boost.

The Reserve Bank of Australia (RBA) will release its latest decision at 2:30pm AEST on Tuesday.

As you're likely aware, the central bank cut rates by 0.25% the last time the board met, on 20 May. This took the official Aussie cash rate to 3.85%.

The question for ASX 200 investors now is, with headline inflation in May falling to 2.4% and signs that economic growth is slowing, will the RBA deliver another interest rate cut tomorrow?

And if so, how low will they go?

If the RBA does ease tomorrow, it would represent the first consecutive rate cuts from the central bank since the flurry of reductions it delivered during the Covid pandemic. Those were intended to keep the economy afloat and, well, spur inflation.

Will the RBA cut the official interest rate by 0.50% tomorrow?

Carl Ang, fixed income research analyst at MFS Investment Management, said he expects the RBA will "deliver a dovish insurance cut of 25 basis points this week".

Looking further ahead Ang said:

Given the ever-shifting shifting balance of risks and the heightened uncertainty it creates for hiring and investment in the Australian economy, more RBA cuts are set to follow. As such, a 3.1% terminal rate by early 2026 remains the base case for this RBA cutting cycle.

As for that supersized interest rate cut that could give the ASX 200 a sizeable intraday boost tomorrow, he added, "A 50 basis points cut at this RBA meeting appears to be a remote possibility given the RBA's stated preference for a cautious and predictable approach to policy normalisation."

So, an outsized cut appears to be 'remote'. But one can hope!

What are the big four ASX 200 banks forecasting?

Consensus is building that we will see the RBA reduce interest rates again tomorrow.

Though there are no guarantees.

According to ANZ Group Holdings Ltd (ASX: ANZ) head of Australian economics Adam Boyton (quoted by Yahoo Finance):

The most recent reads on consumer confidence showing the prior uptrend remains stalled and ongoing uncertainty around US trade policy as we approach the expiry of the tariff pause, we now expect the RBA to cut the cash rate by 25 basis points at its July meeting,

Commonwealth Bank of Australia (ASX: CBA) senior economist Belinda Allen said it's going to be a close call.

Allen noted:

[The] monthly CPI print capped off a flow of data that should provide comfort to the RBA that a swifter return of the cash rate to neutral is both manageable and needed.

The decision to cut the cash rate in July will still be a close one. We expect there to be a discussion of both leaving the cash rate on hold and cutting by 25 basis points.

Luci Ellis from Westpac Banking Corp (ASX: WBC) also cautioned not to count your chickens before they've hatched, saying another interest rate cut tomorrow isn't a "shoo-in".

Ellis said:

In short, only because the RBA sees itself on a path of cutting rates soon will it decide to validate market pricing and get on with the next cut at its July meeting. But this is not the timing it previously thought it would be on.

Given the lingering uncertainties and the RBA's concerns about a tight labour market, expect its post-meeting language to be non-committal, even a little grudging about the decision to cut.

National Australia Bank Ltd (ASX: NAB) is also on board with a forecast for a 0.25% cut tomorrow.

While, according to a survey by The Australian Financial Review, both Citi and Morgans Financial expect ASX 200 investors and mortgage holders will be waiting until at least August to see the next round of RBA interest rate relief.

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