RBA predicted to keep rates on hold, with possible cut in June

Economists are predicting the Reserve Bank of Australia will keep interest rates on hold today, but say a further cut of a quarter of a percentage point is likely in the next few months.

The RBA is meeting this morning and an announcement will be made this afternoon, but it is predicted interest rates will remain at 3%.

CommSec chief economist Craig James told SmartCompany he doesn’t see the value in cutting rates right now.

“We see cutting rates as more of a negative since it would be interpreted negatively by the community. Borrowers are more likely to pay off home loans at a faster rate and this doesn’t increase spending,” he says.

James says the housing market is already stimulated, with weekly strong clearance rates for both Sydney and Melbourne.

Despite this, James says there is some scope for a rate cut soon enough.

“The Australian dollar is still too high and the Europeans benefited from an interest rate cut, which was interpreted well. “

“But there was good news on Friday with unemployment in the United States decreasing, so I think the employment figures will be enough to keep the RBA on the sidelines,” he says.

On Friday, the US Bureau of Labor Statistics reported the unemployment rate had decreased to 7.5% in April, from 7.6% in March.

Australian Property Monitors senior economist Andrew Wilson told SmartCompany there has been mixed economic news in the past month and the “most reasonable” option for the RBA would be to keep interest rates steady.

“There has been a rise in unemployment (in Australia) and the deterioration of the federal budget. But at the same time the stock market has started to pick up and there has been better international news.”

“The evidence is mixed so the most reasonable result would be a rate on hold, but the outlook isn’t as good as it was a month ago,” he says.

Further evidence of a likely hold on interest rates came yesterday morning as the Australian Bureau of Statistics retail figures indicated that Australian retail turnover has risen 3.2% since March 2012.

CPA Australia head of business and investment policy, Paul Drum, told SmartCompany there could be a 0.25% reduction, but this is more likely to happen next month.

“I think the RBA will hold fire just at the minute. There is pressure between the Reserve Bank and fiscal policy and I think they’ll wait and see the budget to move.”

Drum says the RBA’s ability to use interest rates as an “instrument to influence economic outcomes” has diminished.

“You can only go so low. The question is about efficacy at the moment, so I think they’ll wait for at least another month,” he says.

Despite the general consensus the rates will be unchanged, AMP Capital Investors chief economist Shane Oliver told SmartCompany rates should be lowered.

“I’m agnostic whether it will be tomorrow or next month. If it was my decision I would cut tomorrow, there has been enough evidence to say that growth is still struggling in the Australian economy,” he says.