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Category: Economic Trends / Money and Monetary Policy / Budget

Economists divided over prospect of interest rate cut

Tuesday, 3 May 2016 06:06:55

Unexpected deflation has fuelled expectations the RBA will make the move. (AAP: Joel Carrett)

Analysts say it is a close call whether the Reserve Bank will cut the official interest rate just hours before the Federal Government hands down its budget.

Nearly half of economists surveyed by Bloomberg believe the RBA will cut the cash rate by 25 basis points to a new low of 1.75 per cent, in what would be the first cut in a year.

Unexpected deflation at the start of the year has fuelled expectations the RBA will make the move, despite falling unemployment and some solid momentum in the economy.

JP Morgan senior economist Ben Jarman said inflation was too weak for the RBA to ignore.

"The issue for the RBA is that, much as you might have a pretty decent conviction that the economy is picking up steam in terms of real GDP growth — we're of that view too — what we've learned from the inflation numbers is that we're starting from further behind than we thought with respect to how much spare capacity there is in the economy," Mr Jarman said.

But a slight majority of economists expect the RBA will leave the cash rate at the historic low of 2 per cent, where it has been since May 2015.

They said falling unemployment and growth in services sectors show there is momentum in the economy.

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