Economists are divided on whether the Reserve Bank will cut official rates at its May board meeting on Tuesday, and the RBA itself may be unsure which way to jump.
Money market traders are leaning slightly towards another 0.25 per cent cut, with pricing on short-term bill rates suggesting a 58 per cent chance of rates being lowered this week.
However, recent economic data has delivered mixed signals on Australian economic conditions, particularly stronger-than-expected employment data.
Combined with the rise in underlying inflation for the March quarter, the solid improvement in workforce numbers might persuade the central bank that the February rate cut is already stimulating the economy.
In view of recent economic indicators pointing to a recovery in economic activity, National Australia Bank chief economist Alan Oster believes the RBA will keep rates on hold.
While acknowledging that the decision will be a close call, Mr Oster is forecasting another rate cut after the July meeting.
Market Economics managing director Stephen Koukoulas also suspects the RBA board will not cut, but concedes that decision is likely to be line ball.
“With no degree of confidence I think the RBA board likely won’t cut,” he said.
“It’s a genuinely line-ball call – it will really depend on the personalities of board members and how they view the health of the economy.
“I expect it will be hotly debated.”
Money market betting on the likelihood of a rate cut has fluctuated wildly since the April board meeting.
After the release of the March quarter inflation data two weeks ago, traders slashed the chance of a rate easing from 75 per cent to 45 per cent.
The recent surge in the Australian dollar and the release of negative economic news in the United States pushed sentiment to 58 per cent on Friday night.
Commonwealth Securities’ economics research team is expecting a rate cut.
In a note issued on Friday, economist Savanth Sebastian said further easing might be necessary to support local exporters.
An easing of monetary policy would likely trigger a sell-down of the Australian currency, which would enhance the competitiveness of exporting companies.
“While another rate cut is a line-ball decision we would expect the Reserve Bank to commit to further stimulus,” Mr Sebastian said in the report.
“It all gets down to the relatively high value of the Australian dollar. In addition inflation remains well contained.”
The RBA will announce its decision at 2.30pm on Tuesday.