Analysts left guessing on timing of Reserve's next rate cut

It's the question dividing economists and financial markets before the Reserve Bank's board meeting next week - will the RBA cut rates or not?

It's the question dividing economists and financial markets before the Reserve Bank's board meeting next week - will the RBA cut rates or not?

The cash rate is at a historic low of 3 per cent, but some analysts said the central bank should continue its easing cycle, which has taken interest rates down by 175 basis points since November 2011.

Financial markets are pricing in a 56 per cent chance the Reserve will reduce rates by 25 basis points on Tuesday. Markets also expect official cash rates to fall to at least 2.5 per cent by the end of the year.

At the same time, the majority of economists are taking a more cautious view, and forecast next month as the earliest one in which the RBA would make a move.

The strongest case supporting a cut is low inflation, said Macquarie economist Gabby Hajj, who supported lower rates.

"Abstracting from the impact that the carbon tax had on the inflation measure, inflation should be running at the bottom end of the target band. The RBA is an inflation-targeting central bank and lower inflation tends to indicate slowing growth and slowing demand," Mr Hajj said.

"In our view, it provides the scope and the catalyst ... to cut in May."

NAB senior economist David de Garis said there had been questions about the strength of the housing recovery, which the RBA had said was central to filling some of the gap expected to be left by the peak in mining investment later this year.

Another factor that could push the Reserve to lower rates was the higher unemployment rate, Mr Hajj said. While the central bank expects unemployment to gradually climb towards 5.75 per cent this year, the present level of 5.6 per cent is already close to that estimation.

In contrast, Barclays chief economist Kieran Davies, who does not expect the Reserve Bank to lower rates on Tuesday, said it could point to improved activity in some sectors of the economy as a sign the earlier cuts were working.

"The housing market has picked up over the past year, house prices are off their lows of last year, consumer confidence is back above average and equity prices are also higher than last year," Mr Davies said.

He said the average interest rate for mortgages and households was already very close to the lows reached during the financial crisis when the economic situation was worse.

UBS chief economist Scott Haslem said prices of some commodities had improved.

He pointed out that the iron ore price was now between $130 and $140, compared with $100 when the Reserve last cut rates at the end of December.

Mr De Garis said the Reserve Bank "could at least argue that the case might be there to wait another month to see whether what we've seen in the past month is a bump along the way, and the recovery is still on track, or whether things have really flattened out, are receding again and the economy could take more stimulus."

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