Finance Finance News Tough budget could keep rates on hold
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Tough budget could keep rates on hold

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Interest rates will likely stay on hold in May but whether they go up or down this year could depend on the severity of the federal government’s May budget.

The Reserve Bank of Australia is widely expected to keep the cash rate at a record low 2.5 per cent when it meets on Tuesday, according to an AAP survey of 15 economists.

Seven economists say rates will remain on hold through 2014, three are forecasting another cut to a new low of 2.25 per cent and five are forecasting hikes later in the year.

AMP chief economist Shane Oliver expects the cash rate to finish 2014 at three per cent but says that will depend on whether or not the federal government delivers a “slash and burn” budget.

“In four or five months, I think there will be enough evidence that the economy has picked up and, therefore, the case will have built for the RBA to start normalising interest rates. But, that is contingent on the government not getting too aggressive with fiscal austerity,” Dr Oliver said.

JP Morgan chief economist Stephen Walters said a tough budget, the persistently high Australian dollar and rising unemployment meant the RBA would likely cut the cash rate to 2.25 per cent in August.