What are the chances of an interest rate cut Tomorrow?

The markets are fairly certain about what will happen tomorrow…

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It's been an absolute car crash of a kick-off to the trading week so far this Monday. The S&P/ASX 200 Index (ASX: XJO) closed at 7,982 points on Friday afternoon. But at the time of writing, the index has plunged down by a horrid 1.6% to just over 7,850 points. No doubt some investors will be hoping that the Reserve Bank of Australia (RBA) rides in tomorrow to save the day with an interest rate cut.

Yep, tomorrow is the first Tuesday in April. That means that the RBA will be meeting in Sydney's Martin Place to decide whether to leave interest rates unchanged, or else to give Australians another interest rate cut.

If the RBA does deliver an interest rate cut, it would be the first since its blockbuster decision in February to lower the cash rate by 25 basis points to 4.1%. That was the first reduction to the cash rate Australians had seen in more than four years. The RBA had presided over one of the steepest rate-hiking cycles in history when it increased the cash rate 12 times between May 2022 and November 2023. That saw the cash rate climb from a pandemic-induced record low of 0.1% to 4.35%.

A reduction to under 4% would be a big deal for the markets, and most Australians.

Interest rate cuts are generally viewed as a tailwind for the share market. Reducing the returns of 'safe' assets like government bonds and cash savings, which is what an interest rate cut does, increases the appeal of 'riskier' assets like ASX shares. Rate cuts also have a stimulatory economic effect, as they immediately put more cash in the pockets of any mortgage-owning Australian.

Will the RBA cut interest rates tomorrow?

So investors would no doubt appreciate a shot in the arm tomorrow when the RBA board meets. But just how likely is a move tomorrow?

Well, we won't know for sure until the RBA releases its decision tomorrow afternoon, of course. However, we can look at what the money markets are pricing in as the most likely outcome today.

The ASX itself runs an 'RBA rate tracker'. This quantifies the movements of the bond markets to determine what kind of likelihood traders are pricing in for a move in the cash rate.

To kick things off, we can almost certainly rule out an interest rate rise, which traders are pricing in at a near-zero chance.

However, as it currently stands, it looks as though the consensus is that the RBA will stay its hand at tomorrow's meeting.

As of 28 March, the money markets were pricing in just an 8% chance that the RBA will reduce the cash rate at tomorrow's meeting. That leaves a 92% chance that rates will remain unchanged.

What's also of interest is that traders have been reducing their bets on a rate cut over the past two weeks or so. Back on 17 March, the markets were pricing in a 12% chance of a rate cut. But that had subsequently fallen to a 10% chance by 21 March, and down to 8% by 24 March, where it remains today.

So, if the betting markets mean anything to you, don't count on a rate cut tomorrow. The ASX might have to rely on something else to get it out of the funk it has started the week off in.

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