Will the RBA cut rates again tomorrow?

Economists are divided as to whether the Reserve Bank board will cut official interest rates for the sixth straight time when it meets tomorrow.

While most economists had been tipping a cut of 0.75%, there is a growing feeling that the RBA may only make a small cut or even leave rates on hold after reducing the official cash rate from 7.25% to 3.25% over the last six months.

That school of thought has become even more popular since RBA Governor Glenn Stevens’ appearance before a Parliamentary committee two weeks ago, when he was extremely upbeat about the Australian economy’s position.

“We have claimed all along that Australia was better positioned than many countries to ride out the international difficulties,” Stevens told the House of Representatives Standing Committee on Economics.

“We can have confidence in our long-run future and in our demonstrated ability to adapt to changing circumstances. If we retain that, there is no reason for any downturn to be a deep one.”

Countering Stevens’ upbeat outlook is an avalanche of bad news from the major economies of the world. Japan’s economy is in freefall, the situation in Europe is getting worse as the eastern European banking system is pushed to the brink, and the situation in the US looks uglier by the day.

ICAP senior economist Adam Carr believes the RBA should leave rates on hold, arguing the rate cuts are working and further cuts will make the inevitable rate hikes (which he expects to start in the second half of the year) all the more destabilising.

“Yet I am hesitant to call the RBA on hold given the fact that the global data is bad, and there are some prominent and extremely depressing global analysts out there who no doubt have the board’s ear,” he wrote this morning.

Wesptac’s chief economist Bill Evans is tipping a cut of 0.25%, down from his original prediction of a 0.75% cut. 

“Decent cases can be made for the RBA to cut by as much as 50 basis points and as little as zero. Given that emphasis on global economic conditions has been the key driver of the RBA’s easing strategy, the sudden collapse in growth in the Asian region… would be a strong signal that now is not the time to pause entirely.”

JP Morgan’s chief economist Stephen Walters is tipping a cut of 0.5%, but admits he does not have his usual level of conviction.

“RBA officials have indicated that the main drivers of monetary policy are offshore events, and the news from overseas since the last board meeting has been uniformly bad. Another ‘modest’ rate cut will help cushion the downside for Australia’s economy, when it inevitably comes.”

The RBA’s decision will be announced at 2.30pm AESDT.

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