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Australia rate cut speculation heats up as export prices fall

[SYDNEY] Investors have ramped up bets on an imminent cut in Australian interest rates as central banks worldwide ease monetary policy to fight the disinflationary drag of falling commodity prices and lacklustre global demand.

Markets now imply a 50-50 chance that the Reserve Bank of Australia (RBA) will cut its 2.5 per cent cash rate by a quarter of a point when it meets on Feb 3.

The probability had been less than 10 per cent a day earlier when an unexpectedly high reading for core inflation was taken as a setback to the case for an easing. "As a small and open economy, highly leveraged to the global growth and commodity cycles, there are good reasons that RBA cash moves generally in the same direction as global rates,"said Su-Lin Ong, a senior economist at RBC Capital Markets. "Risk-reward is shifting against staying on the sidelines,"added Ong, who is now tipping two cuts this year.

The sea change in the market began when a well known RBA watcher in the media wrote that a rate cut next week was almost certain, though he cited no sources for his prediction.

There was a further boost when a policy statement from the US Federal Reserve was viewed as dovish by bond investors, sending yields on 30 year Treasuries to all-time lows as the market pushed out the timing of a first hike there.

Notably the Fed added "international developments" as a risk to the outlook, likely a nod to the recent spate of easings by central banks globally.

Indeed, it was quickly followed by a policy outlook from the Reserve Bank of New Zealand which for the first time conceded the possibility that the next move in its rates could be down.

The RBA last cut rates in August 2013, but with so many other central banks on the move it is under mounting pressure to follow suit - if only to stop the local dollar from rising against their currencies.

While the Australian dollar has slid against its US counterpart, it has risen sharply on the euro as the European Central Bank finally took the plunge into buying sovereign debt.

Data out on Thursday also underlined the domestic case for stimulus as prices for the country's exports were stagnant in the fourth quarter of last year, even as import prices rose by 0.9 per cent.

For 2014 as a whole, export prices were down a steep 9.1 per cent led by huge falls in iron ore. The resulting decline in the terms of trade is eating into company profits and national income, darkening the outlook for economic growth.