Business slams RBA decision but economists expect relief in May

Business groups have slammed the Reserve Bank for failing to cut rates at yesterday’s board meeting, but economists say they may not have to wait much longer, with May now targeted as the most likely month for a reduction.

The speculation comes after RBA Governor Glenn Stevens said yesterday the pace of economic output was weaker than expected, even though global economic recovery is still underway.

Economists had largely expected the bank to remain on the sidelines in April.

The Australian Retailers Association led the charge against the RBA, saying the decision to leave the official cash rate at 4.25% was a “king hit”, especially after ABS data showed retail sales grew by just 0.2% in February.

“As the industry sector directly responsible for one in 10 jobs, the effects of job losses in retail have a much wider economic impact as the indirect impacts reverberate through sectors such as manufacturing and logistics,” ARA executive director Russell Zimmerman said.

The move also came just hours after the Australian Chamber of Commerce and Industry said businesses needed to see some relief from a cut in interest rates.

However, some relief isn’t far away, according to economists, who say language in the RBA’s statement indicates a cut will come in May.

Westpac economist Bill Evans said there was a “very clear message” the Board decided to reserve any decision cuts until the next inflation report on April 24. And as the board said inflation was likely to be in the 2-3% target band for some time, a cut in May is definitely possible.

“Even though the Governor notes that ‘data on demand and output’ will also influence the decision in May, we would be surprised if a benign inflation print does not ensure a rate cut,” Evans said.

But Evans goes further, suggesting that whether rates go even lower will be dependent on the response by commercial banks to the rates decisions.

“We have also noticed in our consumer sentiment reports that the banks’ responses to RBA policy have had an impact on confidence. Accordingly any significant slippage would mean that the RBA’s final target would need to be even lower than the 3.75%.”

ANZ economists Justin Fabo and Ivan Colhoun have said the board’s consideration of output growth being lower than expected is “an important change of tone”.

However, while it says a cut in May is expected, “the big questions revolve around whether the RBA will cut rates further beyond next month”.

“The key here is if output growth remains below trend rates notwithstanding a further easing in policy in May. The result of this might be an unusually drawn out easing cycle which started late last year.”