Australian markets bet on rate cut as mining cool down looms
* Markets price 90 pct probability of RBA rate cut Tuesday
* A 25 bps cut would match record low of 3.00 pct
* Cool down seen after "biggest mining boom in a century"
* High Aussie dollar should spike if no rate cut
* Rates may ultimately fall toward 2 pct to drag down mortgage rates
SYDNEY, Dec 4 (Reuters) - Investors are increasingly confident Australia's central bank will cut interest rates on Tuesday to match a record low as it tries to insulate the resource-rich economy from a looming cool down in the red-hot mining sector.
A suite of soft economic figures from retail sales to job ads and company profits on Monday added to pressure on the Reserve Bank of Australia (RBA) to safeguard the country's enviable track record of 21 years without a recession.
"When you have the biggest mining boom in a century coming off the boil, it's quite possible we could see a couple of quarters of economic contraction in the next 12 to 18 months," said Brian Redican, a senior economist at Macquarie in Sydney.
"To lessen that risk we think the RBA should cut this week, and continue easing next year as well."
After Monday's data, markets were wagering that a cut was almost a done deal with swap rates implying a 90 percent probability of an easing at the central bank's monthly policy meeting.
If the cash rate is trimmed a quarter point to 3 percent as expected, that will match the record lows touched during the dark days of the global financial crisis in early 2009.
A Reuters poll of 23 analysts on Friday found no less than 16 expected a cut.
With so much priced in, an easing could actually have little impact on the stubbornly strong Australian dollar, which has held above parity against the U.S. dollar for most of the past two years compared with a long-run average closer to 70 U.S. cents.
On the other hand, a decision not to cut rates would shock the market and lift the currency to $1.0500 for the first time since September.
Much might depend on whether the central bank flags a continued easing bias in its post-meeting statement, which is due at 0330 GMT.
"In the absence of this, we doubt the AUD/USD will fall very much on the day, if at all," says Ray Attrill, global co-head of currency strategy at National Australia Bank in Sydney.
"Failure to cut meanwhile probably means we shoot straight up above the $1.0490 November high and onto a $1.05 handle, whereupon we suspect pent up exporter demand will carry us higher still."
That itself is an argument to ease since the strength of the currency has been a bane to exporters in Australia, particularly in the manufacturing industry.
Investors also suspect rates will have to go even lower than 3.0 percent to truly stimulate the economy. This is in part because the spread between the RBA's cash rate and the rates that really matter in the economy, such as for home loans, are wider now than just a few years ago.
That's because commercial banks have not been passing on the central bank's cuts in full, citing the need to protect profit margins in the face of higher funding costs.
Thus when the cash rate last got to 3 percent in April 2009 it pulled the standard variable mortgage rate down to 5.75 percent. Yet current mortgage rates are around 6.65 percent with a cash rate at 3.25 percent.
Theoretically then, to engineer a mortgage rate of 5.75 percent in today's funding environment would require the cash rate to fall under 2.5 percent.
"This is one reason we think the cash rate could ultimately trough at 2 percent," says Macquarie's Redican.
(Reporting by Wayne Cole; Editing by Neil Fullick)