Deloitte: RBA May Decision Could Disappoint Aussies on Scale of Cut

There is sufficient room for the Reserve Bank of Australia (RBA) to reduce the overnight cash rate when the central bank's monetary board meets in May, economists and analysts said on Tuesday.

However, Deloitte Access Economics warned that the cut could disappoint Australian businesses and families because of the scale of the rate cut. Analysis indicates it would likely be only 25 basis points.

"Chances are it will nudge rates down a notch, given that the big banks have done some nudging of their own in the other direction, and as the inflation outlook looks less of a worry," Bloomberg quoted Deloitte partner Chris Richardson.

The broadest hint of a rate reduction came from RBA Governor Glenn Stevens who said the central bank is waiting for the March quarter inflation report scheduled for release before noon of Tuesday, April 24.

Economists are forecasting a first quarter consumer price index rate higher than 0.6 per cent. An inflation rate below 0.8 per cent is enough reason for the RBA to cut the overnight cash rate.

Another justification for an almost sure rate cut is the unexpected 0.3 per cent reduction in the producer price index (PPI) released on Monday. The PPI is a measure of what companies pay for goods, manpower and other inputs to manufacture commodities.

One of the major reasons for the fall is the strong Australian currency despite the falls in agricultural and mineral prices that has kept import prices low.

"The bottom line is, will inflation be low enough to see the RBA cutting rates next week and we see the PPI as evidence that it's likely," Mozo quoted HSBC Australia chief economist Paul Bloxham.

Banks, meanwhile, continue to insist that their wholesale funding cost is still higher to justify their recent decision to go against the RBA policy direction. ANZ Chief Executive Phil Chronican cited on Monday that the lender's funding cost in the last six months rose to 18 basis points versus the 12 basis points increase in its variable interest rate.

Any RBA decision to cut the current overnight cash rate of 4.25 per cent in May could, however, be negated by the big 4's decision to go the other way.

National Australia Bank chief economist Alan Oster added that there appears no further justification for the RBA to cut rates after May.

"But in the longer run, we remain unconvinced that further rate cuts will be necessary in 2012 unless activity and the labour market weakens by more than we expect," The Herald Sun quoted Mr Oster.