RBA Hints of May Overnight Cash Rate Cut

Even if the Reserve Bank of Australia (RBA) kept on hold the overnight cash rate of 4.25 per cent for the third straight month, the central bank did not discount the possibility that it may cut interest rate in May.

RBA Governor Glenn Stevens acknowledged its economic forecast issued in February was too optimistic with economic growth pace apparently lower. The rate cut, however, is premised on inflation being under control.

The Australian economy grew only 2.3 per cent in 2011, way below the RBA forecast of 3.25 percent which is also the target for 2012.

He said the board believes it would be more prudent for the RBA to wait for the March quarter inflation report due for release in three weeks before it discusses an overnight cash rate reduction on May 1.

However, a downgrade in growth prospects would negatively impact the government budget and Treasurer Wayne Swan has admitted it would make delivering the promised $1.5-billion surplus in 2012-13 more difficult. Mr Swan said that by returning the budget to surplus, it would help ensure that the RBA has the flexibility to further cut rates.

Several groups criticised the RBA for retaining the overnight cash rate for the third straight month.

Australian Chamber of Commerce and Industry Economic Director Greg Evans said business groups were disappointed with the RBA policy because outside the mining industry, conditions are weak and a rate cut could have help rebuild confidence and boost demand.

The House Industry Association (HIA) and the Australian National Retailers Association also said the RBA should have cut the rates on Tuesday.

"Given the current global and domestic economic conditions, a rate cut would have been the appropriate call but regrettably the Reserve Bank board did not take that decision," HIA senior economist Andrew Harvey was quoted by thewest.com.au.

"Considerable pressure is now mounting to see an easing of official rates at the May meeting of the RBA, which we consider to be absolutely critical," Mr Evans said.

Had RBA cut the cash rate by 25 basis points to 4 per cent, Australians with a $300,000 mortgage would pay $49 less on their amortisation if the banks would pass the rate cut in full.

However, that is another matter since for the past two RBA decisions, the big four opted to increase their interest rates even if the central bank held on to the 4.25 per cent overnight cash rate.