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Odds on: Reserve Bank of Australia tipped to cut interest rates at May meeting

04 May 2015 Written by 

Meanwhile, credit market pricing late on Monday had the possibility of a cut on Tuesday at 77 per cent, among its highest points for nearly three weeks.

Punters weigh in

The bookies are also allowing a punt, with Sportsbet.com pricing a cut of between 1 and 25 basis points  at $1.57, out from $1.35.

"Initially punters were convinced the rate would be on hold for a third consecutive month," Sportsbet.com spokesman Shaun Anderson said .

"However the last week has seen a late push for a rate cut, with the money now 50/50 between a cut or a hold," he said.

Some of that movement can be ascribed to The Age's economics editor Peter Martin, who last week asserted that the RBA would cut at its May meeting.

 

Sluggish outlook

Most economists agree, pointing out that despite recent surprises in economic data, the rebalancing of the Australian economy away from mining and resources investment is far from complete. 

"For the RBA Board meeting [on Tuesday], the combination of sub-trend GDP growth, lower terms of trade and a low inflation environment all tilt the odds towards the RBA delivering a 25 basis point cut to 2 per cent," said TD Securities chief Asia-Pacific macro strategist Annette Beacher.

"We expect the sluggish outlook for non-mining activity to keep the RBA's easing bias on the table for many months to come," she said.

Monday delivered some other data surprises, with the ANZ job advertisement series for April coming in ahead of expectations and the TD Securities-Melbourne Institute monthly inflation gauge confirming that price increases are subdued and occurring only in some parts of the economy.

Apartment boom

The Australian Bureau of Statistics also confirmed that constant growth in dwelling approvals is being driven by demand for apartments and other types of high-density housing.

"Monday's firm building approvals suggest that ... monetary policy is having a positive impact on economic activity," said St George senior economist Hans Kunnen.

"We expect the RBA will cut the cash rate to 2 per cent  at its May meeting," he said.

House price worry

While the RBA is happy to see housing construction pick up some of the slack left by the sharp decline in mining investment, it has regularly expressed concern at the rate at which Sydney house prices are increasing - currently more than 10 per cent a year.

As any further cut in official interest rate could add fuel to that fire, the RBA is now relying on so-called "macro-prudential" tools - direct controls on bank lending overseen by regulators - to avert any big build-up of risks to the banking system caused by higher-risk loans.

Such controls, implemented mainly by the Australian Prudential Regulation Authority (APRA), also help temper house price rises.

"APRA's been in discussions with the whole industry about this," Westpac chief executive Brian Hartzer said on Monday.

"We're all on the same page here. Nobody wants to fuel a speculative credit boom."

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