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RBA will cut rates: economists

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April or May? Either way, borrowers may soon get a nice boost to their bank balances with the central bank set to slash interest rates to a new record low.

Market pricing for an April rate cut ramped up this week, after the price of iron ore, Australia’s biggest export, slumped to new record lows.

Overnight, iron ore fell below $US50. Iron ore for immediate delivery to the port of Tianjin in China fell to $US49 a tonne, from $US51, while at the port of Qingdao it was $US49.53.

Media reports this week also predicted an April cut, amid suggestions some journalists had received backdoor briefings by the Reserve Bank of Australia.

The market is pricing in a more than 70 per cent chance that the RBA board will cut the cash rate from 2.25 per cent to two per cent when it meets on Tuesday.

It has fully priced in a cut by May.

And while the economists are divided on which month it’ll happen, all 20 surveyed by AAP expect an official interest rate of two per cent by May.

Barclays chief economist Kieran Davies brought forward his rate cut forecast from May to April, citing the Australian dollar’s failure to fall as dramatically as the iron ore price.

While RBA governor Glenn Stevens has previously put fair value for the Aussie dollar at around 75 US cents, it was probably even lower now that iron ore prices had deteriorated further, he said.

“With commodities slumping again and the currency only partly reflecting that, you’ve got a gap opening up again between the currency and the terms of trade and I think that’s been a persistent source of frustration for the RBA,” Mr Davies said.

TD Securities chief Asia-Pacific macro strategist Annette Beacher said it would be more prudent for the RBA to hold fire until May, when March quarter inflation figures will have been released.

It would also give the RBA more time to assess whether measures by regulators to curb property investor activity were actually working, as Sydney’s housing market reaches new record highs in the wake of February’s rate cut, she said.

“The RBA is in a very difficult position in that they do need to balance out the impact on housing as opposed to helping out the rest of the economy,” Beacher said.

CoreLogic RP Data figures on Wednesday showed that Sydney home prices jumped three per cent in March, and 14 per cent over the past year – double the growth rate of all the other capital cities combined.

But economists say property prices won’t be an impediment to further cuts, since macroprudential tools can be used to address those issues.

Westpac chief economist Bill Evans, one of the first to predict February’s rate cut, says the language used by the RBA in the statement accompanying its March decision suggested an April cut.

The recent iron ore price slide, and the Australian dollar’s resilient response, compounded the justification for a cut next week, he said.

– AAP

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