Argument for June RBA rate cut looks “pretty attractive” but with housing market overheating risk: AFR's Alan Mitchell

The Reserve Bank may be swayed to cut the cash rate by a further 25 basis points at its June 4 monetary policy meeting, according to Australian Financial Review economic writer Alan Mitchell.

Mitchell basis this expectation on the lower than expected March inflation reading, the weaker Australian dollar and weak economic data coming out from China, the US and Australia.

“If there is no real improvement in the economic outlook in the next month or so, the RBA could be faced with a tough decision: turn the [easing] bias into a rate cut or risk weakening its effect on the foreign exchange market,” he wrote in the Saturday AFR.

Mitchell writes that the risk in cutting the cash rate to 2.75% - below the lowest cash rate setting since the onset of the GFC – would be making monetary policy too lose with the “more serious domestic risk” that low rates would overheat the property market.

But he says there are “no signs of the dreaded housing market-driven credit boom” and along with retail sales being “not particurlarly strong” despite recent recoveries, a slowdown in car sales, unemployment rising and a weak labour market in the US all make the argument for a rate cut “pretty attractive”.

Mitchell says uncertainty about where the US and Australian economies may yet show signs of improving makes waiting until June an attractive option for the RBA.

“The bank will have its own revised forecasts of the Australian economy in time for the May meeting.

And he says, if the RBA waits until June, it will get another month of global data plus the federal budget as well as update on investment intentions  from the March quarter business capital expenditure.

A small majority of economists surveyed by Bloomberg last week tipped the RBA to cut the cash rate in June with 13 out of 27 tipping a 25 basis point rate cut and one economist (Richard Gibb from Macquarie Group) tipping a cash rate setting of 2.5% with expectations of rate cuts in May and June. The remainder expect no change.