New low? Crunch time for the cash rate

6 May 2019, Sydney, Australia - For the first time in almost three years, the stakes for a cash rate cut are high among industry experts, according to Finder, Australia's most visited comparison site¹.

In the latest Finder RBA Cash Rate Survey™ – the largest of its kind in Australia – 40 experts and economists made their predictions. While 25% (10/40) predict an easing of the cash rate at their next meeting (7 May), 84% of experts are forecasting a cut by August 2019.

If the Reserve Bank slashes the rate by 25 basis points tomorrow, the cash rate will drop to a new historical low of 1.25%.

This is the 30th meeting since the RBA last cut the cash rate – from 1.75% to 1.5% – in August 2016.

Graham Cooke, insights manager at Finder, said the increased prediction for a cut was driven by recently released consumer price index (CPI) numbers and the waning housing market.

"The latest 0% inflation results may have far-reaching implications for our economy. While the results came as a bit of a surprise to our panel, flat inflation will be a huge worry for the RBA, who are aiming to keep inflation between 2% and 3%.

"A quick rate cut would be the textbook way to stimulate the economy - but the general trend here suggests they will wait until after the election, and pass on a cut in June.

"Irrespective of May's decision, the majority of experts (84%, 32/38) expect at least one cut by August and many expect another cut after that – meaning a cash rate of 1% is in sight," Cooke said.

Three-quarters (73%, 29/40) of experts predict the cash rate will drop to 1% or lower by the end of year.

"Just 8% of experts (3/40) think the next rate movement – when it does happen – will be an increase. We've gone from nearly 90% of experts predicting an eventual rise in 2018 diminish to just a tenth of that now. This is a dramatic shift."

Cooke said the pending cut could be welcome news for borrowers.

"There's a whole generation of Aussie homeowners who are yet to experience a rate cut – or any movement to the cash rate for that matter. This could mean confusion over what actions to take following a change.

"If we don't get a cut on Tuesday, it's incredibly likely we will see one within the next three months. If the banks follow suit, this could be great news for borrowers because it means the cost of borrowing will become cheaper.

"That said, you don't have to wait for a rate cut or for your lender to pass on the savings to ensure you're getting a better deal on your home loan. Right now is the perfect time to go home loan shopping – look for a rate with a '3' in front of it," Cooke said.

Chief Economist for IFM Investors, Alex Joiner, is one of the three-quarters of experts who think the rate will hold yet again, but he said this month's meeting could go either way.

"This is the first 'live' meeting for the RBA for some time.

"However, the timing of the Federal election does give rise to the prospect of [a cut] being politicized, which may be awkward for the [Reserve] Bank," Joiner said.

Cooke said along with the election, some economists cited stable employment data for why the rate may hold.

Positive sentiment from Finder's Economic Sentiment Tracker, which gauges 5 key indicators – housing affordability, employment, wage growth, cost of living and household debt – has tipped more negative this month, with the exception of employment.

Housing affordability saw the largest drop in positive sentiment from its all-time high of 59% last month to 39%, its lowest level since August 2018.

Here's what our experts had to say:

Nicholas Frappell, ABC Bullion (Hold): "Although the CPI figures were a surprise, and the case for a cut is evenly balanced, I think the RBA can wait and look for confirmation before deciding to cut in May. Also, automotive fuel costs were the biggest deflationary factor in the March data, and crude prices are more expensive now. Clearly, the RBA's language in April introduced a more dovish emphasis, but given the firm jobs market, the RBA can choose to wait until after the election."

Shane Oliver, AMP Capital (Decrease): "Rate cuts were already on the way thanks to slower economic growth and the downturn in the housing cycle, but weaker than expected underlying inflation in the March quarter argues that the RBA should move sooner rather than later."

John Hewson, ANU (Decrease): "Getting worried about [the] outlook."

Alison Booth, ANU (Hold): "Economic fundamentals do not yet justify a change."

Malcolm Wood, Baillieu (Hold): "Despite a strong case for a rate cut, we expect the RBA to avoid political controversy just over a week from the election."

David Robertson, Bendigo Bank (Hold): "Very close call, as the inflation report was very weak, but expect they may wait a month or two to see how the jobs data progresses."

Ben Udy, Capital Economics (Decrease): "The economic outlook is now weaker than the last time the RBA cut rates and is likely to deteriorate further."

Michael Blythe, CBA (Hold): "Rate cuts unlikely to do much for the inflation or growth outlooks."

Tim Moore, Credit Union Australia (Hold): "RBA will shift to an easing bias. Whilst CPI came in below expectations and moving away from the RBA target range, until we see weakness in the employment data we believe the RBA will remain on hold."

Trent Wiltshire, Domain (Hold): "Due to weaker than expected inflation in the March quarter, the RBA will shift its commentary to an explicit easing bias, but will hold off from cutting rates this month."

John Rolfe, Elders Home Loans (Hold): "Pressure is there for a reduction but with an election in 11 days, I believe the RBA will hold."

Debra Landgrebe, Gateway Bank (Hold): "It appears that the market is expecting it, with the softer than expected inflation outcome. However, unemployment data remains stable. A cash rate cut does appear imminent either in May or June."

Mark Brimble, Griffith Uni (Hold): "Short term rates have declined and thus the money market may provide liquidity and or Actual rates relieve pressure. More likely next month and system weakness remains."

Alex Joiner, IFM Investors (Hold): "This is the first 'live' meeting for the RBA for some time. The weaker than expected inflation data gives the RBA a trigger to ease policy immediately. Underlying inflation has unambiguously decelerated. However, the timing of the Federal election does give rise to the prospect of such a move being politicized - which may be awkward for the Bank. Also, the RBA may choose to focus on the labour market in its deliberations and with employment growth still solid and the unemployment rate trending lower this is still progress towards its objectives. The Statement on Monetary Policy will give the RBA the opportunity to make the case for its action. The arguments are finely balanced, and I would not be surprised if the RBA cut rates in May."

Michael Witts, ING Bank (Decrease): "The inflation print is a concern for the RBA notwithstanding the positive labour market the RBA will be seeking to reflate the economy. It must be remembered that interest rate changes have a lagged impact on the economy."

Peter Boehm, KVB Kunlun (Hold): "There's no compelling reason to move rates right now although this may be a different story in four to six months time. Moving rates in the month of the Federal election would not appear to be a prudent move because political and economic certainty go hand in hand."

Leanne Pilkington, Laing+Simmons (Hold): "It's as close a call as the RBA has faced in recent times. The March quarter CPI figures were a bit of a shock but we still see the hold pattern as the prudent course. A single rate cut takes time to wash through the system and generate an impact and the economic situation is fluid, particularly given the upcoming election, so leaving rates unchanged for now seems appropriate."

Nicholas Gruen, Lateral Economics (Hold): "They may (finally) want to cut what with the disastrous recent inflation numbers, but they may then revive the doctrine that interest rate changes during an election campaign are 'political', something that Glenn Stevens effectively refuted by pointing out that not cutting rates was also political. I think they'll find it (psychologically) easier to sit on their hands for another month."

Mathew Tiller, LJ Hooker (Decrease): "Despite the ongoing labour market strength and the looming election, persistently soft inflation data and weakness in housing markets will prompt the RBA to cut rates at its May board meeting."

Geoffrey Harold Kingston, Macquarie University (Hold): "The recent dip in inflation will have caught the Bank unawares & it may well try & save face by using the upcoming meeting to signal that it will cut soon."

Stephen Koukoulas, Market Economics (Decrease): "Weak economy, low inflation."

John Caelli, ME Bank (Hold): "The case for cutting the cash rate has increased significantly, however, we expect the RBA to hold and wait for more data before cutting to a new record low."

Michael Yardney, Metropole Property Strategists (Decrease): "In its April minutes the RBA acknowledged that "a rate cut would be appropriate if inflation didn't move any higher and unemployment printed up." In the last months, both inflation and GDP growth must have disappointed the RBA. While unemployment has remained stable, inflation has been falling, being 0% for the last quarter."

Mark Crosby, Monash University (Hold): "It is line ball, however I think that the RBA will take the view that a 25 basis point cut won't do much for inflation - they have really wasted their ammunition with the last two cuts. So cutting now just puts them further below the point where conventional monetary policy has any impact."

Katrina Ell, Moody's Analytics (Hold): "Need unemployment to consistently head higher before cutting rates. This hasn't happened."

Jacqueline Dearle, Mortgage Choice (Hold): "Cutting the cash rate could serve to stimulate the property market. National dwelling values have been consistently trending lower for seventeen months according to CoreLogic. However, history shows us that the RBA does not move the cash rate during an election campaign, so the RBA is likely to hold the cash rate in May. However, a number of factors would make the case for a cut when the board meet again in June or August, should some of the key current factors prevail."

Dr Andrew Wilson, My Housing Market (Hold): "Although latest inflation data remains subdued, low inflation in isolation should not be a catalyst to change the interest rate cycle after nearly three years on hold. Early signs of higher wages growth, a continuing strong labour market and indications that recent declines in house prices may now be bottoming out suggest the RBA will remain on the sidelines for another month."

Andrew Reeve-Parker, NW Advice Pty Limited (Hold): "The RBA is unlikely to act in an election month."

Jonathan Chancellor, Property Observer (Hold): "The RBA will wait and see the effect of the tax cuts."

Matthew Peter, QIC (Decrease): "The drop in inflation in the first quarter is the tipping point for the first RBA rate move since 2016. The RBA has been clear in its intent that if inflation were to falter, rates would be coming down. This is now the case, so there is no longer any hurdle for a rate cut."

Noel Whittaker, QUT (Hold): "No point in lowering them - nothing to be gained."

Nerida Conisbee, REA Group (Hold): "This is a hard call! Inflation numbers are terrible but jobs still looking ok. Plus there is an election coming up. I'm going with hold but I am not as confident as with my previous calls."

Sveta Angelopoulos, School of Economics, Finance and Marketing, RMIT University (Hold): "Although inflation figures point to a potential decrease in the cash rate the RBA may hold off a little longer, waiting for the election outcome (and reaction), as well as the March 2019 National Accounts information."

Christine Williams, Smarter Property Investing P/L (Hold): "Due to our Federal election May 18th 2019."

Janu Chan, St.George Bank (Hold): "It will be a close call. Low inflation and weak growth outlook suggests a case can be made for a rate cut. However, the ongoing strength of the labour market suggests that the RBA may want to wait to see incoming data unfolds. Recent RBA commentary suggests it may want to reconcile the strength in the labour market and weak economic growth before acting."

Brian Parker, Sunsuper (Decrease): "CPI may have been the straw that finally broke the camel's back. Consistent below-target inflation and the likelihood of a softening labour market justify a cut."

Jonathan Pain, The Pain Report (Hold): "Too close to the election."

Sandy Suardi, University of Wollongong (Hold): "Concern with falling housing prices and possible weakening demand in the real estate sector despite a falling inflation rate."

Richard Holden, UNSW Business School (Decrease): "Inflation, or lack thereof."

Other participants: Bill Evans, Westpac (Hold)