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Australian election rate cut calls grow as decision nears

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A slim majority of economists polled by Reuters expects Australia's central bank to keep rates at a record low this week although calls for an easing have grown louder after disappointingly weak first-quarter inflation.

[SYDNEY] A slim majority of economists polled by Reuters expects Australia's central bank to keep rates at a record low this week although calls for an easing have grown louder after disappointingly weak first-quarter inflation.

The Reserve Bank of Australia (RBA) has left policy at 1.50 per cent since last easing in August 2016, and as many as 25 of 42 economists polled in late April expect this record spell of unchanged rates to extend on May 7.

A raft of banks from ANZ to ING, JPMorgan and Citi are among the 17 predicting a cut on Tuesday. This is a sharp turnaround from the previous poll in March when a majority had forecast unchanged policy until 2020.

Expectations changed rapidly after official data showed key measures of underlying inflation favoured by the RBA averaged around 1.4 per cent for the year, marking 13 quarters below the central bank's 2-3 per cent target range.

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"We struggle to see how core inflation can get back to 2 per cent without additional monetary stimulus," ANZ economists said.

The change in the outlook accompanies disappointing fourth-quarter gross domestic product data for March quarter while retail sales - a gauge of consumer health - have also remained tepid for some time now.

A rate cut on Tuesday could challenge the federal government's campaign claim that it is a strong economic manager ahead of a national vote on May 18.

"We suspect the RBA would prefer if monetary policy was not politicised during a close and fractious Federal election campaign," said Bank of America-Merrill Lynch economist Tony Morriss, who expects policy easing between July and September.

"Fiscal policy is set to become more expansionary, whoever wins."

Opinion polls show the opposition Labor Party might emerge as a winner.

A majority of economists in the Reuters survey, including Mr Morriss, predict two cuts to 1.00 per cent later this year as the slow economic momentum has already led the RBA to ditch its long-held tightening bias.

Across the Tasman Sea, New Zealand's central bank is in a similar conundrum. It will meet on May 8, one after day the RBA and is seen more likely to lower rates after signalling an easing bias in its last meeting.

"We think an RBNZ cut to match Australia's 1.50 per cent cash rate is the most likely outcome," Mr Morriss said.

"A hold for the RBA on Tuesday might reduce the chances of a cut from the RBNZ on Wednesday, at least at the margin." 

REUTERS