What to expect this on interest rates

AT 2:30 this afternoon, Australians will be tuned in to the one piece of news that will affect everyone. So what should you expect?

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AT 2:30 this afternoon, Australians will be tuned in to the one piece of news that will affect everyone — whether you’re a homeowner, a business person, a retiree or just someone who wants money in the bank.

The question on everyone’s lips will be whether the Reserve Bank will cut interest rates to a historic low of 2 per cent — or if it will keep them at (the already historic low) of 2.25 per cent.

The rates were last dropped in February, which was the first time the figure had moved in 18 months. All the major banks and lenders followed suit by passing on at least the full 25 basis points at the time.

While many economists expected another rate cut to follow in March, it didn’t happen. However, the minutes of the March meeting signalled that the RBA came very close to cutting the rate.

Many commentators pointed to a reinvigorated housing market in Sydney and Melbourne as the reason why the RBA may have held back on a rate cut last month. And while the Sydney market is still booming — the biggest ever auction day was on the day of the state election, no less — the situation is far from replicated in most other capitals.

The bonds market is factoring in a 75 per cent chance of a rate cut today

Other factors in the Australian economy point to a rate cut. The iron ore price slumped to record lows earlier this month while the terms of trade, unemployment, consumer confidence and business confidence remain shaky.

The real question around the interest rate cut is not if the RBA will cut rates but when. All 20 economists surveyed by AAP last week predicted the official cash rate will be 2 per cent by May.

Barclays chief economist Kieran Davies brought forward his rate cut forecast from May to April, citing the Australian dollar’s failure to fall as dramatically as the iron ore price.

While RBA governor Glenn Stevens has previously put fair value for the Aussie dollar at around 75 US cents, it was probably even lower now that iron ore prices had deteriorated further, he said. “With commodities slumping again and the currency only partly reflecting that, you’ve got a gap opening up again between the currency and the terms of trade and I think that’s been a persistent source of frustration for the RBA,” Mr Davies said.

TD Securities chief Asia-Pacific macro strategist Annette Beacher said it would be more prudent for the RBA to hold fire until May, when March quarter inflation figures will have been released.

It would also give the RBA more time to assess whether measures by regulators to kerb property investor activity were actually working, as Sydney’s housing market reaches new record highs in the wake of February’s rate cut, she said.

“The RBA is in a very difficult position in that they do need to balance out the impact on housing as opposed to helping out the rest of the economy,” Ms Beacher said.

Originally published as What to expect this on interest rates