In an unexpected turnaround, analysts are now forecasting lesser chance of an overnight cash rate cut by the Reserve Bank of Australia (RBA) in Tuesday's monetary committee meeting. The explained the change to more scope on the part of RBA to delay another round of interest rate reduction, particularly broad-based market rallies since January and strong job news from the U.S.

Until the last weekend, analysts and economists were forecasting another 25-basis point rate cut by the RBA.

The U.S. unemployment rate in January was at its lowest level in almost three years at 8.3 per cent, indicating acceleration in the largest economy in the world.

"People are looking at that data and saying the U.S. labour market looks the best it has since the recession started.... So, the case for the RBA to cut rates tomorrow is materially weakened," The Sydney Morning Herald quoted UBS interest rate strategist Matthew Johnson.

Ivan Colhoun, ANZ Bank head of economics, pointed out that markets are now a lot calmer while there is no significant deterioration in the European and market situation. He added that Australia's mining investment boom appears to be accelerating, indicating that Aussies may have seen the last RBA rate cut for now unless Europe falls in a complete heap, Mr Colhoun said.

The new forecast is supported by Bloomberg's analysis which predicted a 52 per cent chance that the Australian central bank would cut the key lending rate to 4 per cent.

Boris Scholssberg, GTX Forex director of currency research, said the market is pricing in a 75 to 80 per cent chance of a rate cut, but concedes "they (RBA) could surprise us and remain stationary."

While RBC Capital Markets economist Michael Turner agrees of a lower chance for an RBA rate reduction, he believes the central bank would still cut the overnight cash rate but commercial banks would not pass in full the rate cut to borrowers. Out of the probably 25-basis point rate cut, he said banks would likely pass on to borrowers only 15 basis point.

AMP chief economist Shane Oliver agreed with Mr Turner that the RBA would still push through with an interest rate cut due to the weakness in the Australian economy.

"The jobs market is weakening, retail sales and housing construction are weak, hour prices are falling, consumer and business confidence are sub-par and inflation is benign and is likely to remain so thanks to the strong Australian dollar," The Australian quoted Mr Oliver.

Even punters hold the belief that the RBA would still cut interest rates on Tuesday, but banks won't pass in full the rate reduction. According to Sportsbet.com.au, 85 per cent of the best is that there would be a rate cut between .01 and .25 basis points, while the chances of the big four passing on the rate cut in full is a steady favourite at $2.

Australian Bankers' Association Chief Executive Steven Munchenberg defended the banks' decision to veer away from the RBA rate cut policy as the sole determinant of future rate cuts because of higher costs of bank funding. However, he acknowledged that banks are not underestimating the anger of borrowers if the RBA rate reductions are not passed in full.

Treasurer Wayne Swan questioned the banks' reasons because Aussie lenders are still among the most profitable among global financial institutions. The business lobby group, Australian Chamber of Commerce and Industry, supported the call that Australian banks must pass in full any rate cuts the RBA could announce on Tuesday.

RELATED STORIES