Economists lean towards interest rate cut

The RBA rate decision looks like going down to the wire, with economists divided as to whether the bank board will cut rates by 25 or 50 basis points or keep its ammunition in reserve and cut when unemployment surges in the coming months. 

Ten of the 19 economists surveyed by AAP expect the RBA to lower interest rates when it meets, with seven favouring a cut of 50 basis points and three tipping a smaller 25 basis point cut. Debt markets are also indicating a cut of 0.25%

But the remaining nine believe the official cash rate will be kept at its 45-year low of 3.25%.

The RBA has cut aggressively in the past six months in a bid to stimulate the economy, with the official cash rate crashing from 7.25% at the start of September to 3.25% in February.

But it left rates on hold in March, with Governor Glenn Stevens saying that previous interest rate cuts and Government stimulatory measures had provided “significant support for domestic demand”.

Helen Kavans, economist with JP Morgan, says her forecasts indicate a 50 basis point cut tomorrow, but she will not be surprised with a smaller cut or no cut.

“The case for a rate cut hinges on whether RBA officials determine they already have delivered sufficient monetary support to counterbalance the impact of the avalanche of bad news on the domestic and offshore economies; our view is they have not.”

But Westpac chief economist Bill Evans believes the RBA will hold its fire – this month or next. “We do not expect another move from the bank until August, when we expect them to resume easing with the objective of bringing rates down by a further 125 basis points.”

CommSec chief equities economist Craig James believes the RBA should cut rates by another 50 basis points and then “retire to the sidelines”, but he acknowledges the RBA faces a tough decision.

“Do we know what the Reserve Bank will do? The honest answer is no. And currently RBA board members probably don’t either – it will get down to a decision on the day.”

However, the likelihood of a rate cut being passed on to borrowers has been questioned this morning after Westpac chief executive Gail Kelly warned that banks’ funding costs had increased, particularly due to the higher price of overseas-sourced funds.   

While the banks have been very quick to pass on rate cuts to mortgage borrowers, rate cuts for business borrowers have been much smaller.

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