RBA tipped to cut mortgage rates to 3% by year's end

THE Reserve Bank is an even money bet to cut the cash rate when it meets on Melbourne Cup day next week.

THE Reserve Bank is an even money bet to cut the cash rate when it meets on Melbourne Cup day next week.

HSBC chief economist Paul Bloxham said while the penultimate decision for 2012 was "too close to call", he predicted on balance the RBA was likely to cut the cash rate to 3% before the end of the year.

"We can think of good reasons to cut or hold," Mr Bloxham said.

"Given that most of the recent 'close call' decisions have seen the RBA err on the dovish side, we think the RBA will probably cut by another 25 basis points next week.

"We expect the local risk of another jump in the unemployment rate will trump other concerns."

Mr Bloxham did add that a decision to hold the cash rate would not surprise either.

He said relatively low inflation, only moderate growth in the second half of the year, a jump in the unemployment rate to 5.4%, falling commodity prices and a "stubbornly high" Australian dollar all pointed to a possible November cut.

On the other side of the argument, the Reserve's decision to cut by 150 basis points already this year, signs of recovery in the housing market and continued growth in the mining sector could persuade the RBA to hold fire on Tuesday.

He said the mining sector was expected to make a "positive contribution to growth" until at least the second half of next year.

"The RBA's objective will be to get activity in the non-mining sectors to gradually rise in the coming months in the hope of a stronger pick-up in the second half of 2013 and into 2014. The RBA is looking for a gradual growth rebalancing," he said.

Economist Adam Carr is also predicting the RBA will cut on Tuesday, but it's not a course of action he endorses.

Mr Carr, who described last month's cut as "madness", actually urged the central bank to hike the cash rate when it meets on Tuesday.

He told APN Newsdesk on Friday the bank needed to consider the long-term consequences of a low cash rate.

"Short term there is nothing, but low rates increase risks of imbalances developing down the track," Mr Carr said.
"I think they should hike 25 basis points, but there is no chance of that."

Originally published as RBA tipped to cut mortgage rates to 3% by year's end