After 12 months with no movement, the Reserve Bank of Australia is tipped to cut the official interest rate to a historic new low.
HSBC Global Research chief economist Paul Bloxham says the RBA will slash the cash rate by 25 basis points to 1.75 per cent, in the wake of inflation falling short of market expectation and tracking well below the RBA’s last set of forecasts.
“This puts the RBA in a tricky spot. Most of the demand indicators have help up recently, with the unemployment rate falling and business conditions improving,” Mr Bloxham said.
“Normally a lift in the activity generates a solid rate of inflation. However, although growth has been solid, it has not been strong enough to keep inflation on target.”
Mr Bloxham said the end of the mining investment boom has brought an extended period of below-trend growth, weighing on wages and price pressures in the economy.
“Global inflation has also been very low,” he added.
“More recently, low global inflation and rates have seen the AUD climb, which is set to weigh further on the outlook for inflation and could also weigh on growth.
“All of this adds up to suggesting that the RBA will need to cut its cash rate further. It now also seems likely that a 25 basis points cut may not be enough.”
John Caelli, treasurer with industry super fund-owned bank ME, echoed Mr Bloxham’s comments, saying low inflation rates could prompt the board to cut today.
“There’s a high probability the RBA will cut the official cash rate by 25 basis points in May and by another 25 basis points by the end of the year,” Mr Caelli said.
“While recent growth and employment data has been positive, the latest inflation figures were well below market expectations and the RBA target band. This will put more pressure on the RBA to cut the cash rate.
“If the RBA considers a rate cut necessary, then a federal budget is unlikely to deter them.”
[Related: US leaves door open for June rate hike]