Two rate cuts likely, economists say

Reported by AAP
Sunday, April 29, 2012
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A May interest rate cut is a certainty and borrowers can look forward at least another two cuts in coming months because of weak inflation, an AAP survey shows.

The Reserve Bank of Australia (RBA) would cut the cash rate at its May 1 board meeting, said all 16 economists that AAP surveyed.

Ten said they expected a second consecutive cut in June and two said that the RBA would cut three times in 2012.

The RBA last cut the cash rate, by a quarter of a percentage point, in December 2011.

RBC Capital Markets senior economist Su-Lin Ong said the much lower than expected March quarter consumer price index (CPI) this week provided the central bank with scope for two rounds of easing.

"We have always been of the view that the economy here has been trading at a sub-trend pace for a while, that the RBA has scope to ease.

"And given that inflation report, it probably has greater scope that previously thought," she said.

Ms Ong said the global outlook and the possibility that the major banks may not pass on all the rate cut would be weighed up by the RBA in its rates decision.

The RBA kept the cash rate on hold at 4.25 per cent after its April 3 board meeting but is expected to cut in May as the CPI data showed inflation remained under control.

The Australian Bureau of Statistics data showed the CPI rose 0.1 per cent in the March quarter, which was far below economists' predictions of a 0.7 per cent rise.

Annual inflation was at 1.6 per cent compared to the 2.1 per cent market forecast.

CMC Markets chief market strategist Michael McCarthy said the federal government's aim of a budget surplus would also be important for the RBA's decision-making process.

"There are two different scenarios: If it's a slashing (spending) budget, that will bring in a June cut immediately," he said.

"If its a more moderate structural adjustment to the budget deficit being made over a number of years, it pushes the potential (cut) back to November."

HSBC chief economist Paul Bloxham said the RBA would be reluctant to cut more than once this year, given a steady performance in the domestic economy and the more complex inflation story.

We remain of the view that the RBA would only cut by 25 basis points (quarter of a percentage point) in May, he said.

"Any more would 'frighten the horses' suggesting that conditions were far weaker than the RBA had been expecting.

"It would also be highly unusual for the RBA to cut by more than 25 basis points unless there was an emergency, and we are currently far from that.

"Indeed, the latest labour market data and business surveys suggest conditions are improving.

"While overall inflation is low, the key drivers have been temporary factors - food prices fell sharply in the first (March) quarter as the boost from last year's natural disasters to food prices unwound."

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