The Reserve Bank board will flip a coin to decide whether or not to cut rates hours before the federal budget is handed down.
Not really, but economists expect the decision to slash rates to a record low of 1.75 per cent will be extremely close at the RBA’s May board meeting on Tuesday.
Ten of the 15 economists surveyed by AAP forecast rates to be held at 2.0 per cent for a thirteenth consecutive month.
However, markets predict a 58 per cent chance of a cut and most economists admit being quite nervous about their forecasts.
The RBA’S key considerations will likely be how long low inflation will continue and whether it signals that demand is shrinking.
Consumer prices unexpectedly fell 0.2 per cent in the March quarter, which was well below the bank’s 2.0-3.0 per cent target band.
The RBA has consistently said continuing low inflation would allow a rate cut “should that be appropriate to lend support to demand”.
ANZ economists argue demand is still strong enough, with unemployment falling to 5.8 per cent last month and the economy growing by 3.0 per cent last year.
“The risks are obviously there, and it’s a close call, but we don’t think the RBA will ease in May,” the ANZ economists said in a note.
Westpac chief economist Bill Evans said inflation wasn’t yet out of the RBA’s target band in the medium-term.
“Confronted with a no policy change forecast for inflation to move back within the band and above trend growth the board is likely to hold rates steady,” Mr Evans said.
Commonwealth Bank managing director of economics Michael Blythe said only three sets of RBA inflation projections in the past 23 years had not forecast a return to the target band within a reasonable time frame.
“The implication is that there is unlikely to be a set of forecasts that would demand a rate cut,” he said.
However, National Australia Bank economists said the RBA was an inflation-targeting central bank and it would ease policy on Tuesday to assist the economy and potentially help lower the unemployment rate more quickly than previously forecast.
“In a close call, NAB now expects the board to vote to reduce the cash rate by 25 basis points,” the economists said.
Mr Blythe said monetary policy choices were sometimes portrayed as picking “the path of least regret”.
“This is a judgement call for the RBA governor and board,” he said.
“It explains why the market is reluctant to go too far beyond 50/50 and why economists are split.”