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.
“Long-term measures to control spending growth would be welcomed but if there’s too much focus on short-term measures like hiking tax rates for ordinary Australian households or a massive cut in government spending, that would raise question marks about how the economy will pick up and whether it may even weaken going forward.
“That would make it hard for the RBA to justify raising rates later this year so, hopefully, the government will avoid that.”
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.
“We just don’t think the transition away from mining is going as well as the RBA would have hoped and the currency is still too high,” Mr Walters said.
“From what we’ve been seeing in the news, the budget is going to be very tough so we think that will particularly undermine confidence in the consumer sector but also the business sector.
“The RBA could stay on hold this year but if things pan out as we think and unemployment is drifting up and there’s a tough budget and the currency is quite high, essentially you end up with the RBA having to do a bit more work.”