Another rate cut? Don't hold your breath

ECONOMISTS at Australia's major banks are less confident that another rate cut is on the cards.

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HOMEOWNERS holding out for another cut in their variable mortgage rate may be disappointed.

While Reserve Bank Governor Glenn Stevens has indicated that the central bank has scope to cut the cash rate again with inflation in decline, economists at Australia's major banks are less confident that another easing is in the offing.

As it is, it is questionable whether retail banks would be in a position to cut their mortgage rates again, even if the RBA does, because of their higher funding costs.

NAB said it no longer expects the RBA to cut the cash rate again. This is already at a 49-year low of 3.0 per cent after a chunky 425 basis points worth of cuts.

Last Friday Westpac changed its view to no more official cuts.

ANZ still has a 2.5 per cent cash rate pencilled in its official forecasts, while the Commonwealth Bank sees a 25 basis points reduction to 2.75 per cent in September.

But CBA chief economist Michael Blythe expects the RBA to be a "reluctant rate cutter from here".

"If you are purely looking at the economy then you wouldn't be doing any more," Mr Blythe told AAP.

"But against that improving (economic) backdrop we have also had this tightening of financial conditions in the last three months ... and the risk is it goes further."

He said the Australian dollar had strengthened, fixed interest rate markets had picked up and the CBA itself lifted its variable mortgage rate.

"The question for the RBA is do they want to see that tightening in financial conditions this early in the piece?" he said.

NAB Capital chief economist Rob Henderson said his bank had changed its view on rates following the recent spate of solid economic data, including NAB's own monthly business survey released on Tuesday.

That showed business confidence jumping to its highest level since December 2007 and conditions at levels not seen since September 2008.

"There is still room for the RBA to cut but it looks like it won't need to," Mr Henderson said in a research note.

There were further signs this week that the worst of the economic downturn has passed.

A key indicator for future economic growth - the Westpac-Melbourne Institute leading index of economic activity - shows that the low point in the series was in February.

The annualised growth rate of the index for May showed a contraction of 3.9 per cent, well below its long-term positive trend of 2.6 per cent.

Revisions to the series show the April reading contracted by 4.1 per cent, while the low was minus 6.1 per cent in February.

The index indicates the likely pace of economic activity three to nine months into the future.

Westpac chief economist Bill Evans says the annualised growth rate has been negative for eight consecutive months with the low point being reached after just five months.

In the last recession the index was negative for 20 months between 1989 and 1991 and took 12 months to reach the low point.

Similarly, it was negative for 16 months between 1981 and 1983 and took 11 months to hit a trough.

"The more rapid recovery in growth gives us some comfort that this economic downturn will be shorter than we saw in these previous cycles," Mr Evans said, releasing the latest index reading.