Finance Finance News An interest rate cut in May now a 50-50 call

An interest rate cut in May now a 50-50 call

Philip Lowe and his board face the tough decision of whether to cut rates in the middle of an election. Photo: ABC
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An interest rate cut this week by the Reserve Bank of Australia appears to have become a 50-50 call.

One quarter of the 40 experts and economists surveyed by comparison site expects a cut on Tuesday, but many have also tipped June and August.

A 25-basis-point cut would result in a record low cash rate of 1.25 per cent, and – assuming the banks pass it on – shave about $60 a month off the average mortgage, according to one rates watcher.

Finder’s insights manager Graham Cooke said irrespective of the May decision, the majority of the experts expect at least one cut by August, with another before the end of 2019.

“We could easily see two cuts by the end of the year, which means a 1.0 per cent cash rate,” he told AAP.

Economists at ANZ and AMP Capital are predicting the cash rate will be cut by 25 basis points on Tuesday, after the weak inflation data released in the last week of April.

AMP Capital chief economist Shane Oliver expects the RBA will make its first rate move since August 2016 this week.

“However, while we remain confident that rates will be cut to 1.0 per cent by year end, it’s a very close call as to whether the bank goes Tuesday or waits till after the election,” Dr Oliver said.

ANZ economists do not believe the May 18 federal election will hold the RBA back, noting the central bank cut the cash rate in 2013 and raised it in 2007 in the middle of election campaigns.

“For the RBA to do nothing would open it up to as much criticism of acting with one eye on politics as a decision to ease,” ANZ’s head of Australian economics David Plank said.

Westpac chief economist Bill Evans said the precedents in previous elections were not relevant, although the RBA will be apolitical in its decision process.

“A decision to begin a new rate cut cycle 10 days out from a federal election will be difficult,” he said.

Mr Evans said the case for a rate cut has strengthened, but Westpac believed the RBA won’t cut rates on Tuesday, but will deliver two 25-basis-point rate cuts in August and in November.

The RBA meeting is the first since the March quarter inflation data, which showed core inflation at 1.4 per cent over the year – the weakest result since records of that measure began in 2003.

But will the banks honour it?

RateCity research director Sally Tindall said that the banks have little excuse not to pass on in full any RBA cuts.

“Right now there’s very little case for the banks to hold back part of a rate cut,” Ms Tindall told AAP.

“The cost of funding has declined significantly over recent months, relieving a lot of the profit pressures on the banks.

“Nevertheless, the banks aren’t required to dance to the beat of the RBA drum and after a tough year in what is a tough market, some banks may still choose not to pass it on in full.”

When the RBA last cut the cash rate in August 2016, the big four banks all passed on smaller mortgage rate cuts of between 0.10 and 0.14 percentage points.

But when it cut rates in May 2016, the NAB, CBA and Westpac all passed the 25-basis-point cut in full, while ANZ opted for a 19-basis-point cut.

But a rate cut next week could see the lowest variable mortgage rate go to 3.19 per cent, saving the average mortgage holder (with a $400,000 home loan over 30 years) about $58 a month.

Ms Tindall recommended trying to keep repayments the same, which would save about $18,500 over the life of the average loan and pay it off 19 months earlier.

-with AAP

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