Opinion leans heavy one way on cash rate decision

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Australia’s official cash interest rate looks set to remain unchanged for a full calendar year, with the Reserve Bank of Australia leaving it untouched after tomorrow’s board meeting becoming the popular pick with a number of leading economists and financial commentators.

In the latest RBA survey from Finder, 31 of the 32 surveyed economist and experts have predicted the central bank will leave the cash rate at 2%.

As far as potential rate changes for the months ahead are concerned, 55% thought a rate cut would occur before 2016 is out. Forty-five percent believed change would not come until 2017 – all who held this opinion projected a rise in cash rate rather than a fall.

The last time the cash rate was adjusted was at the RBA’s May 2015 meeting, when a reduction of 0.25% was announced.

The fact that the Federal Government is set to hand down the federal budget tonight has been cited by many as key reason why the RBA will keep the cash rate on hold.

“The Reserve Bank will probably look to leave the official cash rate untouched in May as they wait to see what impact the Federal Budget will have on consumer confidence,” Jessica Darnbrough from Mortgage Choice said.

“Depending on the outcome of the Budget, we may see the Reserve Bank push rates down at least once more this year,” Darnbrough said.

Michael Witts, head of treasury at non-major lender ING Direct agreed that any rate movement would be unlikely until the full scope of the budget is known.

“While the RBA would like to see the AUD lower, we believe they will wait until the impact of the Budget is defined prior to considering adjusting the cash rate,” Witts said.

Not all those who believe the RBA will keep the cash rate on hold put the decision down to the looming budget however.

“I don't see any reason why the Reserve Bank will vary the position they have held over the past 12 months. I think there would be a level of concern about lenders moving rates outside their own decision so it might be best to keep the cash rate as is,” Paul Ryan, founder of financial advice portal Eccho Me said.

The dissenting voice on the survey,  Commonwealth Bank equities economist Savanth Sebastian, said inflation figures being outside what the RBA would like will be the reason for a cut.

“While we don’t think there is a screaming need for interest rates to be cut on economic activity grounds, the low inflation result opens the door for the Reserve Bank to cut rates if they deem it is necessary,” Sebastian said.

“When it comes to inflation central banks across that globe are facing the same concerns. The bottom line is that underlying inflation is undershooting the 2-3 per cent target band and that suggests little risk in cutting rates a little further.”
 

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