No rate cut in April, say economists, with Westpac and others forecasting May cut

The Reserve Bank looks set to leave interest rates unchanged for the third straight month tomorrow  and might only cut rates once between now and September, two surveys of economists suggest. 

All 25 economists survey by Bloomberg expect the RBA to leave rates unchanged when it meets tomorrow, and just over half (14) expect the RBA to cut rates by to 4% on May 1. 

Interest rate futures markets are factoring in a greater possibility of a rate cut – they say there is about a 40% chance the RBA may loosen its monetary policy tomorrow. 

Looking ahead to the June 5 monetary policy meeting, 13 economists expect the cash rate to be at 4%, just three expect a further rate cut to 3.75% and a significant one-third expect the cash rate to remain at the current 4.25%. 

A separate poll of 18 economists carried out by the Australian Financial Review expects the Reserve Bank to cut interest rates just once more over the next six months to September.

Twelve out of 18 economists polled expect the cash rate to drop to 4% over the next three months, with only Annette Beacher from TD Securities forecasting two rate cuts over the next six months. The remaining five expect rates to remain on hold over the next three months. 

The economists polled by the AFR predict lower inflation will make it possible for the RBA to cut rates. 

However Westpac chief economist Bill Evans says the RBA decision will be live tomorrow and could be swayed to cut rates. 

Evans says that if it were Westpac’s decision, it would cut rates tomorrow. 

“The bank's decision will be finely balanced and as always determined by subjective judgements. For the board to cut rates, it will need to be absolutely comfortable that the threshold for a move which has been clearly communicated in recent statements – that ‘demand conditions weaken materially – has been crossed. 

“While we believe that this condition has already been met, we feel that on balance a prudent central bank will decide to wait. Therefore we are maintaining our forecast for the next rate cut to be in May, followed by July,” says Evans. 

Evans says Westpac’s recent Coast-to-Coast report highlights the multi-speed nature of the Australian economy, complicating the decision for the RBA. Economic demand soared in Queensland (10.0%) and Western Australia (11.1%) in the second half of 2011 but contracted in South Australia (–0.6%), Tasmania (–0.7%) and Victoria (-0.4%). 

The report notes that NSW received a timely boost from its coal sector but it has still only managed to grow at a below-trend 2% in 2011. 

Similarly, CommSec chief economist Craig James says a “raft of sectors are under pressure in the current environment – retailers, manufacturers, home builders – and we can add banks to the list. 

“The case for another rate cut remains strong,” he says. 

Su-Lin Ong from RB C Capital Markets expects two rate cuts in 2012 due to a “sub-trend pace of growth, rising jobless rate, likelihood of further independent increases in standard variable rates, and a still challenging global outlook suggest the RBA should be doing more to support demand”. 

Ivan Colhoun, head of Australian economics and property research at ANZ, says recent communications by the Reserve Bank suggest the market is underestimating the chances of a reduction in the official cash at next week’s RBA board meeting notwithstanding  the recent increase in pricing by the market. 

“The minutes for March, together with a recent speech by the governor, contain subtle but important evolutions in the bank’s thinking. This raises our confidence in ANZ’s forecast of a rate cut by May and suggests a move at the April meeting cannot be ruled out,” says Calhoun. 

Writing in the Eureka Report, Alan Kohler says there are three reasons why the RBA should cut interest rates tomorrow. 

Firstly, as has always ready been pointed out by other commentators such as Mark Bouris and John Symond, Kohler says “Australia's non-mining economy is stagnant at best”. 

While the mining the mining investment boom is locked and not dependent on China's GDP growth, Kohler says the other parts of the Australian economy are more vulnerable to a slowdown in China than they have ever been “because of their reliance on bulk commodity exports”. 

Kohler backs retailer Solomon Lew’s view that the RBA should cut rates by 50 basis points tomorrow to provide stimulus to the economy in light of planned spending cuts by the government to get the budget back in surplus by 2012-13. 

“The RBA will need to counter [the budget cuts if not next week, then in May and June,” says Kohler.

Lastly Kohler says a rate cut is needed to prevent the housing market from weakening further. 

“I had meetings this week with a senior banker and one of the country's largest housing developers, and it was clear that the banks are going to be restraining credit for a long time and this is going to suppress demand for housing.

“For investors it means cash rates will fall again this year so you should think about locking in with term deposits, if you haven't done so already,” Kohler says.

A mixed bag of recent economic data will add to the complicated picture for the RBA and could encourage it to keep rates unchanged until there is more evidence about which way the economy is heading. 

In the December quarter GDP growth was just 0.4% (below expectations of 0.8%) and housing starts fell another 7%. 

However the number of job vacancies rose 0.7% over the three months to February 2011, with 182,000 positions vacant while ANZ job advertisements also picked up. Commenting on these figures, CBA economist James McIntyre said deterioration in vacancies would bolster the case for a rate cut. 

Figures released today by the Rismark-RP Data show capital city home values rose 0.2% over the month of March 2012, leaving the market flat (0%) for the first quarter of 2012.