Interest rates to stay at 3pc, economists say

THE Reserve Bank is unlikely to change interest rates when the board meets tomorrow, economists say.

Hold steady ... the RBA is likely to keep the official cash rate at 3pc at its board meeting tomorrow / File

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THE Reserve Bank is unlikely to change interest rates when the board meets tomorrow, economists say.

In a survey of 20 Australian economists, 19 said an improved economic outlook would most probably persuade the central bank to leave the cash rate at the current 49-year low of 3 per cent.

The lone dissenting voice was the National Australia Bank, which is forecasting a 25 basis point monetary policy easing.

Westpac senior economist Justin Smirk said a rate change was unlikely, given signs of improvement in the world economy and low interest rates.

"There are uncertainties out there, but it does seem the global situation is stabilising,'' he said.

In the minutes of its April board meeting, the RBA said "tentative signs of improvement" could be seen in some economic indicators for several countries, but it was "too early to judge how durable they would prove to be".

Mr Smirk said the RBA's decision to cut rates by 25 basis points last month showed it had adopted a more cautious approach to monetary policy, after having eased sharply - by some 425 basis points - since September last year.

However, NAB senior economist Spiros Papadopoulos said the prospect of a rising jobless rate over the second half of 2009 meant a rate cut was possible.

"That is going to have a big impact on consumer confidence (and) that is why we see the RBA cutting until the end of the year," he said.

While economists almost unanimously agreed there would be no rate change in May, many still expect the RBA would be required to do more in the second half of 2009.

Nomura Australia chief economist Stephen Roberts said the RBA would be under pressure to act due to the pressures of higher funding costs at retail banks.

Nomura expects the cash rate to bottom out at 2 per cent by the end of the September quarter.
Mr Smirk said the RBA would be keen to keep some ammunition in store for when the full impact of the recession is felt.

"We're lagging behind the cycle a little and we think there is some further weakness domestically to come through," Mr Smirk said.